ABC Pharmaceuticals has a patent which gives it the

exclusive right to produce and market a revolutionary

new weight loss pill.

A) Assume ABC is making an economic profit. Draw a

correctly labeled graph and show the profit

maximizing price and quantity.

B) Assume the government imposes a lump sum tax on

ABC.

1. What will happen to output and market price?

Explain.

2. What will happen to ABC's profits?

C) Assume instead that the government gives a per

unit subsidy to ABC for the production of this pill.

1. What will happen to output and market price?

Explain.

2. What will happen to ABC's profits?

D) Now assume that ABC's patent for the pill expires.

What will happen to ABC's economic profits in the

long run?