= 40 4. A vaccine for the p variant. It is the Fall of 2028. The cabinet of President Rodriguez is fighting the p variant of the virus that first hit the United States eight years ago. The administration is looking for ways to assist pharmaceutical companies to develop and roll out a vaccine as quickly as possible. The Center for Disease Control and Prevention (CDC) estimates that the inverse demand for vaccines is given by D-1(Q) = 20 36, where Q is million of doses. (a) Assume that two companies - Trizer and Olderna come up with equally effective vaccines and are authorized by the CDC to market their drugs to the public. Both have a constant marginal cost of $2. Compute the equilib- rium price and the doses produced in the scenario in which the government abstains from any intervention and firms compete a la Bertrand. (10 points) (b) Consider the R&D phase for both companies. Assume that the cost of developing the vaccine is $1 billion for Trizer and $1.2 billion for Olderna, respectively. Anticipating that both research efforts will be successful and that CDC will approve both drugs, are Trizer and Olderna going to develop their respective vaccines? (10 points) (c) Now assume that CDC decides to only approve Olderna's vaccine. The company would be responsible for their own R&D expenditures but would be given the right to charge the monopoly price for their vaccine. What would be the price and quantity produced in this setting? Would Olderna's profit be enough for them to develop the drug, in the case in which the innovation cost was as above? (10 points) (d) Assume that President Rodriguez decides to fully cover the R&D cost for both Trizer and Olderna and charge a tax of $3 per vaccine. What would be the equilibrium price and quantity under Bertrand competition? What would be the cost for the taxpayer, i.e. R&D subsidy net of tax revenue? (10 points) = 40 4. A vaccine for the p variant. It is the Fall of 2028. The cabinet of President Rodriguez is fighting the p variant of the virus that first hit the United States eight years ago. The administration is looking for ways to assist pharmaceutical companies to develop and roll out a vaccine as quickly as possible. The Center for Disease Control and Prevention (CDC) estimates that the inverse demand for vaccines is given by D-1(Q) = 20 36, where Q is million of doses. (a) Assume that two companies - Trizer and Olderna come up with equally effective vaccines and are authorized by the CDC to market their drugs to the public. Both have a constant marginal cost of $2. Compute the equilib- rium price and the doses produced in the scenario in which the government abstains from any intervention and firms compete a la Bertrand. (10 points) (b) Consider the R&D phase for both companies. Assume that the cost of developing the vaccine is $1 billion for Trizer and $1.2 billion for Olderna, respectively. Anticipating that both research efforts will be successful and that CDC will approve both drugs, are Trizer and Olderna going to develop their respective vaccines? (10 points) (c) Now assume that CDC decides to only approve Olderna's vaccine. The company would be responsible for their own R&D expenditures but would be given the right to charge the monopoly price for their vaccine. What would be the price and quantity produced in this setting? Would Olderna's profit be enough for them to develop the drug, in the case in which the innovation cost was as above? (10 points) (d) Assume that President Rodriguez decides to fully cover the R&D cost for both Trizer and Olderna and charge a tax of $3 per vaccine. What would be the equilibrium price and quantity under Bertrand competition? What would be the cost for the taxpayer, i.e. R&D subsidy net of tax revenue? (10 points)
