The Federal Trade Commission seeks to ensure that the process of bringing new low-cost generic alternatives to the marketplace and into the hands of consumers is not impeded in ways that are anti-competitive. To illustrate the potential for economic profits from delaying generic drug competition for one year, consider cost and demand relationships for an important brand-name drug set to lose patent protection:

TR = $10.25Q - $0.01Q2

MR = ∂TR/∂Q = $10.25 - $0.02Q

TC = $625 + $0.25Q + $0.0025Q2

MC = ∂TC/∂Q = $0.25 + $0.005Q

Where TR is total revenue, Q is output, MR is marginal revenue, TC is total cost, including a risk-adjusted normal rate of return on investment, and MC is marginal cost. All figures are in thousands.

A. Set MR = MC to determine the profit-maximizing price/output solution and economic profits prior to the expiration of patent protection.

B. Calculate the firm’s competitive market equilibrium price/output solution and economic profits following the expiration of patent protection and onset of generic competition.