recitation_problem_intellectual_property_protection_soln

recitation_problem_intellectual_property_protection_soln -...

Info icon This preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
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.
Image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern