Werck, a pharmaceutical company, is developing a new AIDS
drug. The demand schedule for the drug, once it has been
developed, is shown in Table 2a. If Werck can act as a monopolist, its marginal revenue from selling the drug will be as
given in Table 2b.
Werck’s fixed cost in developing the drug is $4 million. The
marginal cost of producing the drug is zero.
a. If Werck develops the drug and can act as a monopolist,
which quantity of output will it choose to produce? What
will its profit be? Does Werck therefore have an incentive
to engage in the costly development of the drug?
b. Suppose now that the government announces that in
order to make AIDS drugs more widely available, it will
force the producer to sell the drug at marginal cost. If
Werck develops the drug, what will the price be and how
much of the drug will be sold? What will its profit be?
Does Werck have an incentive to engage in the costly
development of the drug?