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Posted by on Thursday, August 27, 2009 at 9:08am.

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:
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.
a. 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?
b. 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?
c. Calculate the annual dadweight loss to society due to the drug firm's market power in Zatab. What exactly does this deadweight loss represent?
d. Given your answer to part c, would it be helpful to society for competition authorities in Europe, Canada, and the United States to limit entry of generic drugs to just five years for new drugs? Why or why not?

  • Managerial Econ - , Thursday, August 27, 2009 at 12:05pm

    As I posted below ... Take a shot. What do you think?

  • Managerial Econ - , Thursday, August 27, 2009 at 12:10pm

    I or others will be glad to critique your thinking.

  • Managerial Econ - , Saturday, April 30, 2011 at 11:51am

    $40 is maximizing price before competiton enters the market. MB is 0 and price elasticity is 1.

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