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) In case of a monopoly firm the priceing strategy is differenct from that f the competitive market. Price is determined at a point where MR= MC.

Diagramatically the monopoly market can be shown as:

The MR is equal to the MC in the monopoly market at the point B. The corresponding price of the market becomes Pm and the quantity is Q. The competitive price is Pc. The deadweignt loss in the monopoly market is the area ABC. This deadweight loss arises in the market as under monopoly the monopolist charge a higher price that it would have under a comepetitive market.

Part b) If the monopoly now becomes a competitive firm, then it would have to charge a price Pc and provide a quantity Q. Under a competitive market, there is no long run economic profit. The competitive firms just obtain normal profits in the long run.

Part c) If the firm manages to provide a vaccine then the government would issie patent to the firm, so as to safeguard the formula of the vaccine, which can be provided by the monopoly only.