Problem
There are two pharmaceutical drugs that can be developed in a country: Avix and Bultran. Each has a product life of 10 years. If Aviar is developed, its demand will be given by p = 80 - q a year. Let M CA = ACA = 40. If Bultran is developed, its the demand will be p = 40 - q a year. Let M CB = ACB = 10. The development cost for Avix is $800, and for Bultran is $900. Each drug has an imitation lag of 3 years.
1. Will either of these drugs be produced without a patent? Explain by calculating the number of monopoly years each drug requires to cover its development costs.
2. Suppose that the government must choose a single patent length for all drugs. What is this optimal patent length? [Hint: For a possible patent length you need to calculate the total surplus in each market over the product life of the drugs, minus the development costs.]