. The Wiley Pharma Company sells an AIDS vaccine in Rich Countries (R) and in Africa
(A). It spends a lot of money in period 0 developing the vaccine (call this amount
R&D). Let us now discuss what happens in period 1. In period 1 it has obtained a
patent for this vaccine, which means that for this period it has a monopoly on selling
it. The demands for the drug in Rich Countries and in Africa can be written:
PR = 59700 -0.1QR (3)
PA = 500 -0.01QA (4)
The Wiley Pharma Company has constant returns to scale, and it costs $3,000,000 to
produce 10,000 vaccines.
(a) What is Wiley?s marginal cost of production (MC)?
(b) Suppose that information flows about prices between Africa and the Rich Coun-
tries is poor, so that if the prices are different no?one will realize, and hence
no?one will try to resell from the cheap to the expensive region. How many vac-
cines will Wiley sell in each region and at what price? What profit does it make
in each region (in period 1)? Draw two diagrams indicating the relevant curves
for each market. [In this question you probably won?t want to draw the diagrams
to scale.]
(c) At the profit?maximizing price and quantity, what are the price elasticities of
demand in the two markets? Is demand more or less elastic in the market where
the higher price is charged?
(d) Suppose now that because the international press has made such a big fuss about
drug prices in Africa, that everyone knows the prices all over the world. So the
firm cannot charge… look on sheet (only q2)Department of Economics Rutgers University
Spring 2022
Jennifer Hunt [email protected]
Econ 320 Intermediate Microeconomic Analysis Problem Set 7 Part 2
due Monday 28 March, 11pm EST
Show all your working on this problem set.
1.Smashhit is a firm that produces tennis raquets. Its (short?run) cost function is:
C = 10q2 + 600q + 1500, (1)
and the demand for tennis raquets is given by
P = 4600 – 10Q. (2)
(a)What is the firm?s average cost (AC) function?
(b)What is its average variable cost (AVC) function?
(c)What is its marginal cost (MC) function?
(d)Sketch these three functions and indicate the range of output over which there is increasing, decreasing, and/or constant returns to scale?
(e)What is the supply curve for this firm assuming it is a competitive firm? (f) What are the firm?s price, output and profit if Smashhit is
i.one firm in a competitive market with free entry into the industry.
ii.the only firm in the market, but government regulations force it to act ?com- petitively?.
iii.a monopoly (with no power to price?discriminate among customers).
iv.a monopoly with the power to perfectly price?discriminate.
2.The Wiley Pharma Company sells an AIDS vaccine in Rich Countries (R) and in Africa (A). It spends a lot of money in period 0 developing the vaccine (call this amount R&D). Let us now discuss what happens in period 1. In period 1 it has obtained a patent for this vaccine, which means that for this period it has a monopoly on selling it. The demands for the drug in Rich Countries and in Africa can be written:
PR = 59700 – 0.1QR (3)
PA = 500 – 0.01QA (4)
The Wiley Pharma Company has constant returns to scale, and it costs $3,000,000 to produce 10,000 vaccines.
(a)What is Wiley?s marginal cost of production (MC)?
(b)Suppose that information flows about prices between Africa and the Rich Coun- tries is poor, so that if the prices are different no?one will realize, and hence no?one will try to resell from the cheap to the expensive region. How many vac- cines will Wiley sell in each region and at what price? What profit does it make in each region (in period 1)? Draw two diagrams indicating the relevant curves for each market. [In this question you probably won?t want to draw the diagrams to scale.]
(c)At the profit?maximizing price and quantity, what are the price elasticities of demand in the two markets? Is demand more or less elastic in the market where the higher price is charged?
(d)Suppose now that because the international press has made such a big fuss about drug prices in Africa, that everyone knows the prices all over the world. So the firm cannot charge separate prices in different markets. Draw the new demand curve.
(e)How many vaccines will Wiley sell now, and at what price? What are Wileys period 1 profits now? Has deadweight loss risen or fallen?
(f)Suppose for whatever reason Wiley charges only marginal cost for its product (in the unified market). Will it make a profit over the two periods? What would be the price and quantity?
(g)Indicate on a diagram (possibly one already drawn) the deadweight loss caused in period 1 by the patent. Don?t bother calculating the amount. Also indicate the area that is a transfer from consumers to Wiley.
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