Problem
Consider a drug that helps prevent premature births in high-risk mothers. firms sell the drug to pharmacies that have a representative demand of P=25-Q. There is a $5 marginal cost of production. (Assume that Q and P are in 100 units/dollars. You do not need to make any adjustments in your math.)There are many firms in the market and each sells exact same version of the drug. There are no barriers to entry.
Task
1) What market structure is implied by the description above? What is the relevant evidence that supports your answer? State profit-maximizing condition and calculate the equilibrium price and quantity, firm profit, and consumer surplus for this market. Show all work.
2) Suppose that one firm is able to patent the drug and become the one seller in the market. What is the new market structure? Calculate the market quantity, market price, firm profits, and consumer surplus.
3) What is the expected elasticity result for your outcome in part b? Show the work that verifies this result.
4) In a few sentences, compare the profits and consumer surpluses between the markets described in parts a and b. Identify the key economic characteristics by which the markets differ, and how that characteristic influences the profit and consumer surplus outcomes in the two markets.