Pharmaceutical firms often face very high fixed costs in order to research and develop their products, but then enjoy low marginal costs of production. Crucially, once the idea for a product has been fully developed (e.g. the compound for a drug has been discovered), other firms may produce it at the low marginal cost, without incurring the high fixed cost of research and development (R&D). 

(a) Draw side-by-side the firm cost structure diagrams both for a pharmaceutical firm that does conduct R&D and for a firm that does not conduct R&D but simply produces products developed by other firms. If the two firms are both in the same market, facing the same price, how would their outcomes differ? 

(b) Now, draw side by side a perfectly competitive market and a monopoly, both facing the same demand curve and with the same marginal costs. Indicate price, quantity, consumer surplus, producer surplus, and deadweight loss (if any) in each market. 

(c) Knowing that it might face perfect competition, do you expect that a pharmaceutical firm would want to conduct research into new products? Why? 

(d) Verbally compare price, quantity, Cs. PS. and deadweight loss in perfectly competitive and monopoly markets from part (b). For each of the two markets, if a government wanted to increase total surplus/welfare, would any of the following policies be helpful a price floor, a price ceiling, or a limitom total production? 

e) In reality, firms developing innovative goods like pharmaceuticals are often granted potents: documents that provide these firms with the right to prohibit any other firms from manufacturing their product. Given your answers in parts (a) and (b), what do you expect to happen if a firm conducting research receives a patent will the firm exercise its patent rights? Why? 

(f) Suppose a firm does exercise its patent rights and acts as a monopolist. Is it possible for this monopolist to increase total surplus/welfare in its market? What tools or information would the monopolist need? Explain with reference to a diagram

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a For a pharmaceutical firm that conducts RD the cost structure diagram would show a high fixed cost of RD and a low marginal cost of production once the product is fully developed For a firm that doe... View the full answer