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Posted by on Sunday, November 7, 2010 at 7:12pm.

Assume the graph below represents the market demand for a patented prescription drug together with the firm-level marginal cost and average cost functions for producing the drug. Assume these cost curves do not reflect R&D costs of developing this drug, but only reflect production costs of the drug once the formula for it is known. (Note: the diagram assumes that in the output range from 250-400 thousand MC =ATC = $20). Rising MC at Q>400,000 increases ATC.)

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