1. A patent increases the incentive to develop new products because it ________ the price of the product and thus generates profit to cover a firms costs of _______.
2. In some cases, a patent is socially inefficient because it merely _______; in other cases, a patent is socially beneficial because it _______.
3. Consider the arthritis drug example on page 547. If the research and development costs are $20 million, Flex joint will develop the drug if it gets a patent that lasts at least_______ years.
4. To prolong their monopoly power, the producers of branded drugs pay millions of dollars to _______.
5. Paying to Keep a Generic Out. Suppose your firm produces a branded drug at an average cost of $2 per dose and a price of $5 per dose. You sell 1,000 doses per day. If a generic version of the drug were introduced, your daily sales would decrease to 400 doses. How much are you willing to pay each day to prevent the entry of the generic version?
6. Patents for NoSmak. A potential new drug, NoSmak, could cure lip-smacking with one dose, but research and development would cost $80 million. The monopoly profit (earned while a single firm produces the product) will be $10 million per year. After a patent expires, the original developer of the drug will have sufficient brand loyalty to earn $3 million per year for another 10 years.
a. What is the shortest patent length required to induce a firm to develop the drug?
b. How would your answer to part (a) change if you ignore the profit earned after the patent expires?