1. The demand for a new drug is given by P = 4 – 0.5Q. The marginal cost of manufacturing the drug is constant and equal to $1 per unit. (Prices and costs are in terms of dollars, and quantities are in millions).
a. Illustrate on a diagram the following curves: demand, marginal cost, and marginal revenue.
b. If the firm receives a monopoly patent, what price does it charge and how much does it sell? Compute the firm’s surplus (profit) from selling the drug, not including fixed costs.
c. Suppose the fixed cost of developing the new drug is $6.5 million. Will the firm want to invest in developing the drug? Is the firm’s decision socially efficient?