Question

1. One of the biggest news stories of the past few months is the outbreak of COVID-19 (novel coronavirus), first in China and then throughout the world. Numerous pharmaceutical companies have begun to develop COVID-19 vaccines. If all goes well, it will be at least a year before a vaccine is developed, tested, and approved by the FDA. However, one company—Moderna Therapeutics—has beaten all of the other companies in the race so far and is the first to advance to Phase 1 clinical trials.

Suppose that Moderna is the first company to gain approval for a COVID-19 vaccine in the United States. The monthly demand for COVID-19 vaccines in the U.S. is Q = 16 – (P/6) where Q is measured in millions of vials and P is measured in dollars. Moderna’s total cost of producing Q vials of vaccine is 2Q² and Moderna’s marginal cost is 4Q.

1.A (15 Points) As the only company allowed to sell COVID-19 vaccines in the U.S., what price would Moderna charge for its vaccine to maximize profit? How many vials of vaccine would Moderna sell each month? What are Moderna’s monthly profits from the sale of COVID-19 vaccine?

1.B (10) How many vials of vaccine would be produced and what price per vial would be charged if this were a perfectly competitive market?

1.C (15) Vaccines, like the COVID-19 vaccine being developed by Moderna, provide benefits beyond the benefits received by those vaccinated. For instance, as more people are vaccinated, the odds of disease transmission to vulnerable groups who cannot be vaccinated (e.g., infants) are reduced. Suppose the marginal social benefit of the COVID-19 vaccine is 110 – 6Q, which is greater than the marginal private benefit. How many vials of vaccine per month should be produced and distributed to maximize social welfare? Compare your answer to the answers in parts (A) and (B). Given this, what role do you think the federal government should play in vaccine development, if any, beyond the determination of safety and effectiveness associated with vaccine approval?

Answer 1