The production of store-brand medicine happens in a perfectly competitive market. For store-brand albuterol inhalers, the...

 

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The production of store-brand medicine happens in a perfectly competitive market. For store-brand albuterol inhalers, the long-run average costs are constant at $57. Demand by retailers is given by: QD=630-0.38P. In addition to those production costs, producers incur costs related to labeling their products to inform consumers that the product is comparable to name-brand inhalers. The labeling and related research costs is estimated to be equal to 1.8Q. a. Is there a market failure here, and if so, which one? Why or why not? b. What would be the quantity of inhalers produced if no labeling were required? c. What is the difference in the price of inhalers as a result of the labeling requirements? d. One of the companies that makes these inhalers is considering investing in research that would develop a new compound that would reduce the need for preventative doses of albuterol. This would cost the company $81,000 to do, but it would only provide them with revenue of $22,000. There is, however, a public benefit valued at $60,000. Find the optimal amount of subsidy the company should be given to encourage this research. The production of store-brand medicine happens in a perfectly competitive market. For store-brand albuterol inhalers, the long-run average costs are constant at $57. Demand by retailers is given by: QD=630-0.38P. In addition to those production costs, producers incur costs related to labeling their products to inform consumers that the product is comparable to name-brand inhalers. The labeling and related research costs is estimated to be equal to 1.8Q. a. Is there a market failure here, and if so, which one? Why or why not? b. What would be the quantity of inhalers produced if no labeling were required? c. What is the difference in the price of inhalers as a result of the labeling requirements? d. One of the companies that makes these inhalers is considering investing in research that would develop a new compound that would reduce the need for preventative doses of albuterol. This would cost the company $81,000 to do, but it would only provide them with revenue of $22,000. There is, however, a public benefit valued at $60,000. Find the optimal amount of subsidy the company should be given to encourage this research.

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aThere is a Market Failure Market Failure is where the ... View the full answer