Question

Suppose Pfizer develops a revolutionary drug that cures the Crohn's Disease an inflammatory bowel disease. The drug is protected by patent for 5 years making Pfizer the de facto monopoly in the market for this particular medicinal need. 6. Suppose that the marginal cost of drug is low and constant at $100 per tablet. The market demand for the drug is described as P-2000 0.5Qd. What is the profit maximizing point of production for Pfizer? What is the corresponding price? a. Calculate the welfare loss to society due to the Pfizer's monopoly power. b. 7

Answer 1

a) For a monopoly we use MR = MC. Here MR has same intercept as demand but twice the slope so MR = 2000 - Q. This gives 2000 - Q = 100 or Q = 1900 units. Corresponding market price which also maximizes profit is 2000 - 0.5*1900 = $1050 per unit

b) First find competitive outcome using P = MC. This gives 2000 - 0.5Q = 100 or Q = 3800 units. Market price is 100. Now welfare loss = deadweight loss = 0.5*(monopoly price - marginal cost)*(competitive quantity - monopoly quantity) = 0.5*(1050 - 100)*(3800 - 1900) = $902,500.