Incorrect ion 15 of 19 Map Phisure is a large pharmaceutical company that has ju
ID: 2494346 • Letter: I
Question
Incorrect ion 15 of 19 Map Phisure is a large pharmaceutical company that has just spent ten years and $2 billion to develop the next blockbuster drug. It types 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 rice and Cost 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 Number 90000000 The government then decides to raise the regulated price to $1.00 and to mandate that the competitive quantity be produced. The government then either rovides Phisure a subsidy or enacts a tax such that it reaks even. How much is the subsidy or tax? Enter answer in millions of dollars. Specify a negative number for a tax Number 180000000 0 20 40 60 80 100 120 140 160 180 200 output (millions)Explanation / Answer
In this problem, firm has developed a medicine that can cure three types of cancer. The firm also holds patent right. So no other firms can maufacture it. Due to this monopoly situation, firm is making economic profit. It is earned when average revenue (AR) is higher than average cost (AC). As AC includes normal profit, anything more than AC is economic profit.
Since it is a life saving drug, government has set a price of $0.90. This price is less than marginal cost of maufacturing the product. Firm has the right to decide how much to produce at this price. A firm expects to earn at least normal profit. It is possible if price set by government is at par with AC. But $0.90 price here is well below the AC curve. So there is no question of earning normal profit.
In this situation firm will continue production if at least variable cost is recovered. In that case firm will hope that situation will improve in future and making at least normal profit will be possible. However at $0.90 price, AVC cost is also not recovered since it is $1. So firm will not produce.
Answer: Production is zero.
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Now government has decided to to raise the price to $1. It will recover variable cost. So firm will continue production in short run. Quantity will be set where price is at par with AVC. Here AVCis $1.00 if 180 million of output is produced. It is competitive quantity produced.
Answer: Production quantity is $18000000
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If government wants to give subsidy so that normal profit is earned, then difference between $1 price and ATC will be the amount of subsidy per unit. It is $2-$1=$1 per unit. So for 180 million output subsidy is also $180 million.