Assume that a pharmaceutical firm knows it can develop a new drug in 12 years at an upfront cost of $300m (incurred in year 1). If the firm undertakes the drug development project, it knows it can earn an annual profit of $200m in each year (starting in year 13) that the drug is under patent.
b. Given the long-term budgetary deficits facing the federal government, some members of Congress have advocated repealing the prescription drug benefit that it created for Medicare beneficiaries in 2003 (i.e. Medicare Part D). If that should happen, how might it affect the firm’s decision to undertake the project?