7. The Placebo Drug Company holds a patent on one of its discoveries.

a. Assuming that the production of the drug involves rising marginal cost, draw a diagram to illustrate Placebo’s profit-maximizing price and quantity. Also show Placebo’s profits.

b. Now suppose that the government imposes a tax on each bottle of the drug produced. On a new diagram, illustrate Placebo’s new price and quantity. How does each compare to your answer in part (a)?

c. Although it is not easy to see in your diagrams, the tax reduces Placebo’s profit. Explain why this must be true.

d. Instead of the tax per bottle, suppose that the government imposes a tax on Placebo of €110 000 regardless of how many bottles are produced. How does this tax affect Placebo’s price, quantity and profits? Explain.