Question: how do I answer this? [50 points] A pharmaceutical company offers a helpful, but not essential, patented drug for price 19 per prescription. It faces
how do I answer this?
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[50 points] A pharmaceutical company offers a helpful, but not essential, patented drug for price 19 per prescription. It faces demand in a local market which can be expressed as Q=100p, where Q is the quantity of standard prescriptions sold. The rm's costs of providing the drug to this local market are captured by the function TC(Q) = 400 + 1062 + Q2. (a) [6 points] Derive marginal revenue, M R(Q), and marginal cost, M C(Q), for this monopolist. Graph both, as well as the price function, against quantity in (Q,$) space (that is, with quantity on the x-axis). Make this graph large, as you will be adding more elements to it below. (b) [6 points] Find the optimal price and quantity of production, as well as the rm's marginal cost at that level of production. Mark the relevant values on each axis of your graph from part (a) using dotted lines, and label them with the correct numbers. What must be the price elasticity of demand at this price level? (c) [6 points] Find the price and quantity of production that would maximize total welfare on the market by facilitating all sales to customers who are willing to pay more than the marginal cost of producing their unit (eliminating deadweight loss). Mark these values with dotted lines to the axes on your graph as well. (d) [6 points] Calculate the size of (i) the consumer surplus in the true outcome of this market (from part (b)), (ii) the deadweight loss on this market due to monopoly, and (iii) the transfer from purchasing consumers to rms on this market due to the higher monopoly prices. (Hint: remember that the area of a triangle is WEE.)
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