A scientist has discovered the vaccine formula to the COVID-19 and received a patent for it...

A scientist has discovered the vaccine formula to the COVID-19 and received a patent for it (a legal monopoly). The scientist has signed a contract with a pharmaceutical company that will produce and sell the vaccine on the market.

The monopoly pharmaceutical supplier faces an inverse demand curve P = 20 - (1/80)Q with marginal revenue MR = 20 – (1/40)Q, where Q is the output of vaccine in units and P is the market price per unit. The company desires to set a market price-quantity for the vaccine to maximize its profits. The monopoly total cost to supply the vaccine is C= (1/200)Q2 + 6Q + 200 with marginal cost MC= (1/100)Q + 6.

Explain your work and show graphically each part below. (Don’t worry if the numbers are not round.)

a. What price and quantity maximizes profit for the monopoly pharmaceutical company?

b. If the vaccine were produced in a competitive market, what would be the market price and quantity?

c. What is the profit/loss the monopoly pharmaceutical company receives? What would be the profit/loss in a competitive market in the long-run?

d. Find the welfare cost associated with the monopoly pharmaceutical company’s price and quantity. Show graphically. Explain the concept of the welfare cost as if you were talking to someone who had not taken a microeconomics course.

e. Briefly, is there any justification that a such a legal monopoly may benefit society?

f. Suppose the pharmaceutical company pays the scientist a percentage of the vaccine total sales (revenues). Would the scientist prefer a different price (than the monopoly profit maximizing price) to set for the vaccines? Explain. (Think about what you would want to maximize here.)

Solutions

Expert Solution

The answers are given below:

Rahul Sunny answered 2 months ago

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