Firm A introduces a drug to treat the common cold. The drug has inverse demand P = 5Q/2 and constant marginal cost of 1 and no fixed cost. Firm B is considering releasing it's own version of the drug. If both drugs are released, they will each have inverse demand P = 2 Q/2. Firm B also has a constant marginal cost of 1 and there is a fixed cost of 1/4 if Firm B decides to develop the drug. (a) What is the social welfare if Firm A's product is offered but not Firm B's product?

(b) If Firm A is not able to patent the drug and stop Firm B from entering, would Firm B want to enter?

(c) What is social welfare if both firms enter the market?

(d) Should a policy maker maximizing social welfare allow Firm A to patent the drug, blocking Firm B from entering?

Answer rating: 100% (QA)

a To find the social welfare if only Firm As product is offered we need to calculate the total surplus Total surplus is the sum of consumer surplus and producer surplus Consumer surplus is the area be... View the full answer