Mirk Labs is a British pharmaceutical company that currently enjoys a patent mon
ID: 1196867 • Letter: M
Question
Mirk Labs is a British pharmaceutical company that currently enjoys a patent monopoly in Europe, Canada, and the United States on Zatab (pronounced zay-tab), an allergy medication. The global demand for Zatab is
Qd = 15.0 - 0.2P
where Qd is annual quantity demanded (in millions of units) of Zatab, and P is the wholesale price of Zatab per unit. A decade ago, Mirk Labs incurred $60 million in research and development costs for Zatab. Current production costs for Zatab are constant and equal to $5 per unit.
1. What wholesale price will Mirk Labs set? How much Zatab will it produce and sell annually? How much annual profit does the firm make on Zatab?
Select one:
a. P = $50; Q = 5 million; profit = $225 million
b. P = $5; Q = 14 million; profit = $0 million (break even)
c. P = $40; Q = 7 million; profit = $245 million
d. P = $37.5; Q = 7.5 million; profit = $243.75 million
2. The patent on Zatab expires next month, and dozens of pharmaceutical firms are prepared to enter the market with identical generic versions of Zatab. What price and quantity will result once the patent expires and competition emerges in this market? How much consumer surplus annually will allergy sufferers who take Zatab gain?
(Recall that area of a triangle = ½ * base * height)
Select one:
a. P = $37.5; Q = 7.5 million; CS increases by $18.125 million ($122.50m to $140.625m)
b. P = $5; Q = 7 million; CS increases by $245 million ($122.50m to $367.5m)
c. P = $20; Q = 11 million; CS increases by $180 million ($122.50m to $302.5m)
d. P = $5; Q = 14 million; CS increases by $367.50 million ($122.50m to $490m)
3. Calculate the annual deadweight loss (DWL) to society due to the drug firm's market power in Zatab. What exactly does this deadweight loss represent?
Select one:
a. DWL = $490 million; DWL represents the increase in profit that Mirk Labs is able to obtain as a result of its market power.
b. DWL = $367.5 million; DWL represents the increase in revenue that Mirk Labs enjoys by selling a patented product with inelastic demand.
c. DWL = $245 million; DWL represents the total drop in happiness that consumers lose (consumer surplus) that becomes transferred as profit to Mirk Labs.
d. DWL = $122.5 million; DWL represents the loss in consumer welfare that results from Mirk Labs' market power.
Explanation / Answer
Mirk Labs is a British pharmaceutical company that currently enjoys a patent mon