Question

In this question, consider the market for a pharmaceutical drug (“A”) that is only produced by one manufacturer.

a) Suppose that the demand for drug A is perfectly elastic. What is the consumer surplus enjoyed by consumers in this market? Why might a regulatory authority not be concerned about the potential for harm caused by this manufacturer’s position as the sole producer?

b) There is only one other drug (“B”), which is made by a different manufacturer, that can be used instead of drug A to treat a common disease. Suppose that the sale of drug B is now banned by the FDA due to concerns about contamination at its manufacturer’s plant. How will this shift the demand curve for drug A? Why? Hint: recall that increases in demand are upward/rightward shifts in the demand curve, and decreases in demand are downward/leftward shifts in the demand curve

c) Assume that it is important that the disease referenced in part b) is treated promptly. Knowing this, do you think that the ban of drug B would also make demand for drug “A” less elastic? Why?

d) Given your answers to parts a) through c), do you think that the ban of drug B would change the level of concern that a regulatory authority might have about there being only one manufacturer of drug A? Why? [

Answer 1

(a) demand for product A is perfectly elastic. Consumer surplus is willingness to pay by a consumer minus actual price in the market. So due to perfectly elastic demand there is zero consumer surplus enjoyed by the consumers. Because willingness to pay will be equal to price. So consumer surplus is equal to zero. A regulator authority might not be concerned about the potential for harm caused by this manufacturer’s position as the sole producer because the demand for product A is perfectly elastic. Therefore, the customers can easily shift to another product when needed. Hence, no concerns.

(b) If the sale of the druge B is banned by the FDA, it will shift the demand curve for the product A to the right. Because product A and B are kind of substitutes.Now if B is banned, people will want A product to cure the disease. So it will increase demand for good A. Hence, shifting the demand for product A to right.

(c) If drug B is banned, then it will make product A less elastic because it is now being made a kind of necessity. Now B is banned, so people will have less choices. The only choice is A. So this will make the product less elastic i.e. increase in price of A will not reduce the quantity demanded of A by greater amount.

(d) Yes, the ban of drug B would change the level.of concern that a regulatory authority might have about there being one manufacturer of drug A because now A has become less elastic. People can not shift to another choices. So the only sole producer of A can charge high price in the market without getting a much decrease in quantity demanded. Hence, may end up in charging very high price for product A.