Question: First answer is D and second answer is A, but I don't know why Big Pharma Corp. is considering developing a new drug paretoflux. The

First answer is D and second answer is A, but I don'tFirst answer is D and second answer is A, but I don't know why

Big Pharma Corp. is considering developing a new drug paretoflux. The operating profit generated by the drug depends whether the patent lasts one or two years. Suppose that Big Pharma can not price discriminate. When the drug is under patent, it sets a uniform monopoly price above marginal cost. With no patent, price equals marginal cost. The resulting operating profits are given in the following table Patent Lasts One Year 500 Patent Lasts Two Years 500 500 Operating Profit (year Operating Profit (year Operating Profit over two years 500 1000 12. The patent length (in years) that maximizes total surplus equals to develop the drug is 250 and a) 0,0 b) 1,1 c) 2, 2 d) 1, 2 e) not enough information when the fixed cost when the fixed cost is 750. (Fill in the blanks.) 13. a) When the fixed cost is low, an increase in the patent length can lower total surplus because b) The patent length should be set to zero because patents can be used to block subsequent c) The patent length should be zero because new drugs will get invented even without patent d) If we pick a patent length to maximize consumer surplus we get a different answer than if we This example illustrates that the dead weight loss of monopoly is incurred over a longer time period innovation protection pick a patent length to maximize the total of consumer plus producer surplus

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