Question

Question 2
Part (a) Consider a firm called Health-R-Us that is a monopoly. How does Health-RUs
decide the price to charge and quantity to sell of the good it has a monopoly on?
Illustrate your answer using a fully labelled and explained market diagram. Assume
Health-R-Us is making monopoly profits and illustrate these on the same diagram. In
addition, indicate the area on your diagram that illustrates the efficiency cost (the
dead weight loss) of the monopoly, and explain why this dead weight loss arises.

Part (b) Assume Health-R-Us is a legal monopoly: it is a monopoly due to legal
protection from the government in the form of a patent issued to the company.
Imagine that the government withdraws the legal protection for Health-R-Us such
that the market becomes competitive. Will a typical individual firm in this
competitive market make economic profit in the long run? Why or why not? Use an
appropriate firm-level diagram to illustrate and explain your answer.

Part (c) Your answers to parts 2a and 2b illustrated different levels of profit made by
an individual firm in both a monopoly market structure and a competitive market
structure respectively. In part 2a you also indicated the dead weight loss of a
monopoly.
Assume now that Health-R-Us has discovered a vaccine for coronavirus. Why might
the government be willing to grant (and allow to remain in place) a patent to Health-
R-Us, despite the dead weight loss and the ensuring monopoly profits caused by
such a patent? Explain your answer. For simplicity assume the vaccine is only
relevant for the domestic market (i.e., there is no global market for vaccines).

Answer 1

A). As a monopoly, it produces a quantity at which marginal revenue is equal to marginal cost and the balance will maintain. This is the profit maximizing condition.

Market diagram:-

In this diagram, the quantity is Qm and price is Pm.

There is an efficiency cost of the monopoly which represent the wastage of resources when the monopoly does not allow the price to be equal to the marginal cost.

This shows that market not have allocative efficiency and that's why consumer surplus is reduced at the cost of producer surplus.

B). Health-R-US makes profit till the time it had legal protection form the government and it was in monopoly. It had freedom to keep high price as there was no competitor and customer had no choice. When Health-R-U enters into competitive market will not be able to enjoy monopoly as there will be more vendors to sell the product. If it want to be in the market then it has to become competitive and charge price as per the demand and supply parameter.

C). In this time government decides to announce that the grant will be provided to the company which finds vacines for the covid-19.

Many companies started to carry out the research activities and hasting in discovery of new vaccines. Due to the government commentment, the newly discovered vaccine get huge recognition in the market and this kind of competition will bring many discoveries in the vaccine research and finally get a solution for that.