Mirk Labs is a pharmaceutical company that currently enjoys a patent monopoly in Europe, Canada, and the U.S. on Zatab, an allergy medication. The global demand for Zatab is Qd= 15.0- 0.2 P 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 cost 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 Zatb 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? Explain your answer.

Mirk Labs is a pharmaceutical company that currently enjoys a patent monopoly in Europe, Canada, and the United States on Zatab, an allergy medication. The global demand for Zatab is: Qd = 15.0 ¡V 0.2P 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? Explain your answer. „h

(A) To determine the wholesale price that Mirk Labs will set, we need to find the price at which the quantity demanded (Qd) equals the quantity supplied (Qs). Currently, Mirk Labs holds a patent monopoly, meaning it is the only supplier of Zatab. Since it is the only supplier, the quantity supplied will be equal to the quantity produced by Mirk Labs.

Given the demand function Qd = 15.0 - 0.2P, we can equate it to the quantity supplied:

Qd = Qs

15.0 - 0.2P = Qs

To find the wholesale price that Mirk Labs will set, we substitute Qs with the quantity produced by Mirk Labs:

15.0 - 0.2P = Q produced by Mirk Labs

To determine the quantity produced by Mirk Labs, we need to consider where the production costs match the demand:

Production cost per unit = Price per unit

$5 per unit = P

Now, substitute P in the original equation:

15.0 - 0.2(5) = Q produced by Mirk Labs

15.0 - 1 = Q produced by Mirk Labs

Q produced by Mirk Labs = 14.0 million units

So, Mirk Labs will produce and sell 14.0 million units annually.

To calculate the annual profit, we need to subtract the total cost from the total revenue.

Total cost = Production cost per unit × Quantity produced

Total cost = $5 per unit × 14.0 million units

Total cost = $70 million

Total revenue = Price per unit × Quantity produced

Total revenue = $5 per unit × 14.0 million units

Total revenue = $70 million

Profit = Total revenue - Total cost

Profit = $70 million - $70 million

Profit = $0 million

Therefore, the firm makes zero profit on Zatab.

(B) After the patent on Zatab expires and competition emerges, dozens of pharmaceutical firms will enter the market with identical generic versions of Zatab. In a competitive market, firms compete based on price, and the price is determined by the market equilibrium where the quantity demanded equals the quantity supplied.

Since the demand remains the same, Qd = 15.0 - 0.2P, and now there are numerous suppliers in the market, the quantity supplied will increase to meet the demand.

To find the price and quantity in a competitive market, we again equate the quantity demanded to the quantity supplied:

Qd = Qs

15.0 - 0.2P = Qs

In a competitive market, the price is determined by the lowest production cost for firms. Assuming the production cost for generic versions is also $5 per unit, we can substitute Qs with the quantity supplied by firms:

15.0 - 0.2P = Q supplied by firms

To find the quantity supplied by firms, we need to consider where the production costs for generic versions match the demand:

Production cost per unit = Price per unit

$5 per unit = P

Now, substitute P in the original equation:

15.0 - 0.2(5) = Q supplied by firms

15.0 - 1 = Q supplied by firms

Q supplied by firms = 14.0 million units

So, once the patent expires and competition emerges, the price will be $5 per unit, and the quantity sold will be 14.0 million units annually, just like when Mirk Labs had a monopoly.

This market outcome is expected because the entry of generic versions does not change the demand or cost structure of the product. The equilibrium price and quantity will remain the same as before the patent expiration due to the identical nature of the generic versions.