Question

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 HealthR-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

PART-A

A monopoly exists when there is only one producer and many consumers. Monopolies are characterized by a lack of economic competition to produce the good or service and a lack of viable substitute goods. As a result, the single producer has control over the price of a good – in other words, the producer is a price maker that can determine the price level by deciding what quantity of a good to produce. Public utility companies tend to be monopolies.

Monopolies have much more power than firms normally would in competitive markets, but they still face limits determined by demand for a product. Higher prices (except under the most extreme conditions) mean lower sales. Therefore, monopolies must make a decision about where to set their price and the quantity of their supply to maximize profits. They can either choose their price, or they can choose the quantity that they will produce and allow market demand to set the price.

Like non-monopolies, monopolists will produce the at the quantity such that marginal revenue equals marginal cost . However, monopolists have the ability to change the market price based on the amount they produce since they are the only source of products in the market. When a monopolist produces the quantity determined by the intersection of MR and MC, it can charge the price determined by the market demand curve at the quantity. Therefore, monopolists produce less but charge more than a firm in a competitive market.

PART B:

A legal monopoly refers to a company that is operating as a monopoly under a government mandate. A legal monopoly offers a specific product or service at a regulated price.

WELL the diagram as shown earlier will be same but if govt withdraws the patent,other firms will also enter the market and then it will be a competitive market situtation where seller cant decide the price alone or he can demand any price he want,rather market forces will decide the price to be kept for the consumer.the main feature of barrier to entry has been lifgted by the govt so the firm will now be in competitve market.the diagram for that will be:

Perfect competition is a market structure with:

• Freedom of entry and exit
• Perfect information/knowledge
• Many firms
• The price is set by the industry supply and demand.
• Firms are price takers; this means their demand curve is perfectly elastic. If they set a higher price, nobody would buy because of perfect knowledge. Therefore firms have an elastic demand curve.
• In the long-run firms in perfect competition will make normal profits.

part C:

govt will allow the company to sell its vaccine for corona virus,as there is a urgent need ,it is in public interst.To end the pandemic, health systems have to vaccinate 50 to 75% of the global population. This requires building manufacturing and distribution capacity, making a new vaccine affordable, deciding who should get access first and planning massive vaccination campaigns.

govt at maximum can put a regulation on the price and bear the cost itself.

Governments also need to ensure that a future vaccine and effective treatments will be widely accessible. They need to agree upfront on rules fo r patent  rights and procurement to avoid high prices, which could prevent the most vulnerable from having access. Public funding, whether allocated through push or pull mechanisms, should be tied to conditions for accessibility and affordability. Governments also need to agree on how to allocate scarce product volumes between them based on need.

the firm can act as a legal monoply and  offers a specific product or service at a regulated price.and govt can also regulated the same.