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.)A) Draw the marginal revenue function for this firm.B) What is the profit-maximizing price for this firm?C) On the graph show the area that represents the economic profit resulting from the firmâs exercise of monopoly power conferred by its patent. Explain your answer briefly.D) If there were no patent to prevent entry, what would the âefficientâ market level of output of this prescription drug be?E) What do you predict will happen to the structure of competition and to the price in this market when the patent expires? (Hint: use the concept of “Minimum efficient scaleâ of production in your answer.)F) Why does the US government create monopoly power through the patent system, given the net efficiency loss from monopoly power? Explain in a paragraph.
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