Consider the following simple model. Suppose that the research and development cost of a new

vaccine is equal to $15. A company X is considering investing in developing this vaccine.

The demand for the final product is given by P=10-Q, where P is the price of one vaccine dose

and Q is the quantity demanded. The marginal cost of producing one dose of vaccine is constant

(i.e. it does not depend on the output level) and is equal to $2. Let's assume for simplicity that

the vaccine production process does not involve any fixed cost. This implies that the average

total cost is also constant and equal to $2.

(a) Suppose that after developing a vaccine, company X can apply for patent which will prevent

other firms from manufacturing and selling this product. Effectively, company X becomes the

monopolist producer of the vaccine it has developed.

What price will it charge for a vaccine dose? How many doses of vaccine will it produce?

Hint: the marginal revenue curve of a monopolist in this market is MR=10-2Q.

How much profit will it make? Given these outcomes, does it have an incentive to develop this

vaccine in the first place?

Demonstrate your answer on a GRAPH, carefully labelling all relevant variables and

concepts.

Overall do you think the patent is a good way to incentivise the development of a vaccine? Can

you think of any possible drawbacks of this arrangement?

(b) Suppose that after company X develops a vaccine, other companies can freely use this idea

to enter the market and produce and sell this vaccine. What will be the resulting market

structure? What will be the equilibrium price and quantity? How much profit will each firm

make? Does company X has an incentive to develop the vaccine on the first place?

Demonstrate your answer on a GRAPH, carefully labelling all relevant variables and

concepts.

Overall, do you think allowing imitation is a good way to incentivise the development of a

vaccine? What are the possible drawbacks of this arrangement?