1. The producers of branded drugs are responding to the introduction of generic competitors by _and_. 2....

Question:

1. The producers of branded drugs are responding to the introduction of generic competitors by _______and_______.

2. Ninja Turtles versus Tai Chi Frogs. The demand for fantasy amphibians is linear, with a slope of $0.01 per amphibian. The average cost of production is constant at $3. The demand curve intersects the horizontal average-cost curve at a quantity of 600 amphibians. A firm selling ninja turtles currently has a monopoly, selling 300 turtles at a price of $6. A second firm is considering entering the market with tai chi frogs, and the minimum entry quantity is 100 amphibians. If the turtle firm is passive and lets the frog firm enter, each firm will sell 200 amphibians at a price of $5.

a. Draw a graph like the one shown in Figure 27.9 on page 588 with all the relevant numbers.

b. Draw a game tree like the one shown in Figure 27.10 on page 588 and predict the outcome of the game. How will the turtle firm respond to the threat of entry? Will the frog firm enter the market?

c. How would your response to part (a) change if the minimum entry quantity dropped to 50 amphibians?

3. Take the Pen Money and Run? Consider the example of Reynolds International Pen and the ball-point pen. Suppose the unit cost of a ballpoint pen is $1.00. Reynolds has two options:

1. Passive. Pick the monopoly price of $13. In the first year, Reynolds will sell 100,000 pens. Overtime as other firms enter the market with lower prices, the quantity sold by Reynolds will decrease by 20,000 per year, to 80,000 in the second year and so on, down to zero in the sixth year.

2. Deterrence. Commit to produce one million pens per year, an amount large enough to deter entry. The limit price is $1.05.

a. Under the passive strategy, the profit per year is $ _______in the first year, $ _______in the second year, and so on, down to zero in the sixth year. The total profit over the 6-year period would be $ _______.

b. Under the deterrence strategy, the profit per year is $ _______. Over a 20-year period, total profit would be $ _______.

c. Taking a 20-year perspective, which strategy is more profitable?

d. How would your answer to part (c) change if the limit price were $1.50 rather than $1.05?

4. Shuttle Deterrence? Consider the market for air travel between Boston and New York. The long-run average cost is constant at $100 per passenger, and the demand curve is linear, with a slope of $2 per passenger. The demand curve intersects the horizontal average-cost curve at a quantity of 120 passengers. The minimum entry quantity is 20 passengers. FirstShuttle currently has a monopoly, with 60 passengers at a price of $220. Another firm, Second Shuttle, is considering the market, and the minimum entry quantity is 20 passengers. If FirstShuttle is passive and lets the other firm enter, each firm will have 40 passengers at a price of $180.

a. Draw a graph like the one shown in Figure with all the relevant numbers.

1. The producers of branded drugs are responding to the

b. Draw a game tree like the one shown in Figure and predict the outcome of the game. How will FirstShuttle respond to the threat of entry? Will SecondShuttle enter the market?

c. How would your response to (a) change if the minimum entry quantity dropped to 10 passengers?
5. Going off Patent. Consider the producer of a branded drug that will soon go off-patent and compete with generic versions of the drug. The average cost of production is constant at $8 per dose. The producer could prevent the entry of generics by committing to a limit price of $10. At this price, the firm will sell 100 doses per day. Alternatively, the producer could charge a price of $12 and passively allow generics to enter the market. The price elasticity of demand for the branded drug is 2.0.
a. Under the passive approach (price = $12), the quantity of the branded drug demanded is_______; the firms profit is _______.
b. Under the entry-deterrence approach, the firms profit is $ _______.
c. The best approach is_______ (entry deterrence, passive).
d. If the price elasticity of demand for the branded drug were 3.0 instead of 2.0, the profit under the passive approach would be $ _______, so the best strategy is _______ (entry deterrence,passive)