Problem: Assume the graph below represents the market demand for a patented prescription drug together with the long run marginal cost and average cost functions for producing the drug. (note: the diagram assumes that at output levels over 50 million AFC ~ 0, and MC is constant so that ATC = AVC =MC = $20)
Q1. Draw the marginal revenue function for this firm.
Q2. What is the profit maximizing price for this firm?
Q3. On the graph show the area which represents the net loss to society resulting from the monopoly power conferred by the patent.
Q4. What do you predict will happen to the structure of competition and to the price in this market when the patent expires ? (Hint: use the concept of "Minimum efficient scale " of production in your answer.)
