recitation_problem_intellectual_property_protection_soln

# recitation_problem_intellectual_property_protection_soln -...

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1 Econ 1101 Solution to Recitation Problem on Intellectual Property Protection in the Global Economy Note: This is the answer sheet for a practice question. See Reading 7 for background. Demand in United States for Econoflex (Total Units sold per year) -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12 0 1 2 3 4 5 6 7 8 9 10 111213 1415 1617 181920 2122 2324 D \$ Q 1. The Big Pharma Corporation is considering developing a new drug Econoflex. The demand curve for the drug in the United States is illustrated above. This shows how the quantity sold per year varies with the price. Suppose the marginal cost to produce one unit of Econoflex is \$2. (This also equals average variable cost.) In this problem, we will analyze the incentive for Big Pharma to innovate and develop the drug. We will consider two possibilities for the fixed cost, \$40 or \$60. We will consider two possibilities for the patent system. In the “weak patent regime,” Big Pharma can get a patent, but it only lasts one year. After the year is over, the patent expires, generic competitors show up, and price falls to marginal cost, P=\$2. In the “strong patent regime,” patents last for two years. For the first step of your analysis, figure out what happens if the firm develop the drug. Calculate the operating profits the firms achieves and how operating profits depend upon whether patents last one year or two years. Recall that operating profits equal revenue less variable costs.

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