Question

Suppose many firms are working on a vaccine for a particular virus (as is currently the case). Once a successful vaccine is discovered, assume it can be produced by firms at a flat marginal cost of MC = 1. Suppose the demand for vaccines is given by QD = 5 − P. (a) (5) Draw the MC and demand curves on a clearly marked diagram. (b) (5) If this were a competitive market, what would the equilibrium price and quantity be? (c) (5) As discussed in class, what is a major reason that the government would grant monopoly power to the first firm to discover 2 the vaccine? In other words, what’s the problem with leaving this as a competitive market? (d) (5) Now, suppose one firm has monopoly power in this market. Let us think about this firm’s profit-maximizing choice. The firm can choose any quantity, from 0 to 5. As shown in class, fill out a table that has columns for quantity (Q), the associated price (P), the total revenue (TR), and the marginal revenue (MR). (e) (5) What is the firm’s profit-maximizing price and quantity? (f) (5) On a clearly marked diagram, show the dead weight loss associated with the monopoly outcome. (g) (5) Suppose the government is concerned that consumers are being hurt by this inefficiency. Consider the following response from the monopolist: “If you allow us to price discriminate, the market will be more efficient.” Discuss why the government would not be satisfied by this response to its concerns

Answer 1