British Biotech is developing a new cancer drug. The demand
schedule for the drug, once the drug has been developed, is
shown in Table 3a. If British Biotech can act as a monopolist,
its marginal revenue from selling the drug will be as shown in
Table 3b.
British Biotech’s fixed cost of developing the drug is $750 million. Its marginal cost is zero.
a. If British Biotech is granted a monopoly for one year,
what will its revenue be that year?
b. If British Biotech does not have a monopoly, other drug
makers will copy its product without incurring any development cost and the price will fall to marginal cost. What
will British Biotech’s yearly revenue be in that case?
c. If the government sets the length of British Biotech’s
patent at four years so that British Biotech is a monopolist
for four years and then other firms can imitate the product (and therefore after four years the price falls to marginal cost), what will British Biotech’s revenue be over
those four years? Is this enough to cover British Biotech’s
fixed cost of developing the drug? (Ignore the issue of discounting over time.)
d. How long would the patent have to be for British Biotech
to cover its fixed cost and so want to invest in development of the drug?