Question

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.



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  • CreatedFebruary 13, 2015
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