Consider the market for a course of antibiotics. Suppose the supply of antibioti
ID: 1138042 • Letter: C
Question
Consider the market for a course of antibiotics. Suppose the supply of antibiotics follows P = 5 + 2QS and the demand follows P = 20 – 2QD. Here, Q represents antibiotics, denominated in millions of units. The use of antibiotics generates an external harm of $2 per Q, due to the risk of increased antimicrobial resistance. Also assume that the supply curve for antibiotics is currently higher than the marginal cost curve. Specifically, prices (as described by the equation P = 5 + 2QS ) are $3 higher than the marginal costs of producing the drugs (for any level of quantity, Q). You can assume for the purposes of this problem that the reason for higher-than-marginal costs supply curve is producer market power.
a) Find the equilibrium Q under the observed supply and demand
b) Find the efficient Q
c) Find the equilibrium Q if the government imposed a $2 tax on antibiotics to force consumers to internalize the externality they generate
d) Find the equilibrium Q if several new producers entered the market, and thereby forced the supply curve down to just equal the marginal cost curve.
e) How do the findings in parts a-d relate to the Theorem of the Second Best? (Two sentences)
Edit: Monopoly
Explanation / Answer
a)
Equilibrium ;
Demand =Supply
5+2Q = 20 - 2Q
4Q = 15
Q = 15/4
= 3.75
b)
New Supply Function:
P = 5+2Q -3
P = 2+2Q
Equilibrium
20 -2Q = 2+2Q
18 = 4Q
Q = 18/4
= 4.5
it is efficient level of output.
c)
New demand function=
P = 20 - 2Q - 2
= 18 - 2Q
Equilibrium:
18 -2Q =5+2Q
13=4Q
Q = 13/4
= 3.25
d)
Influx of more firms in market will increase total quantity or supply and it will shift to right thereby increase the quantity and reducing price level.
e)
part a does not satisfy the optimal condition, hence change in variable would lead to optimal result that is yielded in the part (D).