Phisure is a large pharmaceutical company that has just spent ten years and $2 b

Question

Phisure is a large pharmaceutical company that has just spent ten years and $2 billion to develop the next blockbuster drug. It cures three types of cancer, significantly increasing life expectancy and improving quality of life. The drug is patented, which enables phisure to charge a price far above the marginal cost of production. Use the graph below to answer the following questions. Unwilling to see pharmaceutical companies profit at the expense of cancer patients, the government decides to set the drug's price to $0.90, but Phisure is still allowed to select how much to produce. How much of the new drug will Phisure choose to produce? Enter answer in millions of units The government then decides to raise the regulated price to $1.00 and to mandate that the completive quantity be produced. The government then either provides Phisure a subsidy or enacts a tax such that it breaks even. How much is the subsidy or tax? Enter answer in millions of dollars. Specify a negative number for a tax.

Explanation / Answer

Here MC=AVC=1

now if P=0.9 then it means that P<AVC. Now if price is not able to cover even variable cost then firm will shutdown production. So company will choose to produce 0 units.

Now if P=1 then from the graph we can see that Q will be 180 million. Here the average total cost = 2 so Total cost = 180*2 million = 360 million

Revenue = 1*180 = 180 million

so For breakeven i.e. Revenue + subsidy = Total cost

Now Subsidy = 180,000,000

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