Graph below represents the market demand for a patented prescription drug together with the marginal cost and average cost functions for producing the drug.
-MC is constant at $20 for all Quantity over 4 million
-AFC is reduced essentially to 0 when Quantity reaches 5 million
- The diagram assumes ATC = AVC= MC = $20 for all Quantity over 5 million
1. Draw the marginal revenue function for firm.
2. What is the profit-maximizing price for this firm?
3. On graph show area which represents the net loss to society resulting from the monopoly power conferred by the patent.
4. What do you predict will happen to the structure of competition and to the price in this market when the patent expires? (use the concept of Minimum efficient scale of production in your answer.) .
Graph - i32.tinypic . com/f0omma.jpg (copy from i to g and get rid of spaces)
Thanks
Ok, I see your graph. It looks like the demand curve crosses the x-axis at about 30. So, the demand curve can be expressed as P=120-4Q. Your question is for a simple monopolist. Total revenue is P*Q = 120Q-4Q2. MR is the first derivitive, so MR=120-8Q. It looks, from your graph, this new line will hit MC when MC is flat at 20.
So optimize where 20=120-8Q.
Take it from here.