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D. [OxyContin marketing] Perdue Pharma has a monop oly on the pain medication called OxyContin, a 1995 formulation of a drug, oxycodone, rst invented in 1916 as a substitute for the use of heroin as a pain killer. The new formulation was a success because it is a long- lasting and effective source of pain relief for serious pain. And because production costs are so low, on the order of 30 cents per 12 hour dose. The slow release/long- lasting aspect also meant that people could reduce the pills to powder and take a full 12 hour dose all at once, providing an intense and tremendously pleasurable high. What is particularly informative about Perdue Pharma, a privately held company, is how it chose the states in the US. for aggressive marketing. They did it on the basis of their regulatory structure. In states where prescribers of Schedule II opiods, such as oxycodone, needed to le three copies of each pre- scription, one for themselves, one for the pharmacy, and one for the state agency tasked with keeping track of these dangers, Perdue Pharma did not market aggres- sively. In the states without these triplicate prescrip- tion programs, the company called and visited doctors,1 paying for their vacations and meals e.g. at medical con- ferences, in resort locations, conferences often about the 1One of my favorite labor market statistics is that drug representatives are dis- proportionately chosen from collegiate cheerleading squads, both female and male. The selection is for outgoing, attractive people to visit the doctors. \"undertreatment\" of pain, and funding pain treatment groups that lobby for the liberalization of the rules for the prescription of Opiods. The basic statistic is that, over the last 20 years, US. deaths from Opiods have gone from roughly 8,000/year to over 46,000/year (2018 is the last year of data that I could nd). And there are extensive subsidiary damages to the population, all of them predictable and predicted. This problem takes you through an intermediate micro analysis of some of the evils involved. We normalize the size of the population of people in a state that need extensive pain relief to 1 and normalize the price of the drug so that the demand function is given by p(q) = 1 (1. Given how cheap the drug is to produce, we will simplify the analysis, and suppose that the average and the marginal cost are 0. To increase prots, Perdue Pharma wanted more ad dicts and a more additive product, pushing the demand curve out to p(q) = (as) sq. The horizontal intercept, 6 >> 1, measures the size of the addicted population in relation to the population needing pain relief, and the slope, 3 >> 1, measures the extent to which the new formulation is more addictive. 1. Find the monopoly quantities, prices, and prots in this market. 2. Drug pushers were often the intermediaries between the pharmacies and the addicts, and they were the ones who wanted to enforce the monOpoly price. Given that Perdue Pharma was not receiving the monOpoly price, what were their prot incentives visavis com- petition between drug pushers? 3. Explain, using simple monotone comparative statics, why Perdue Pharma marketed aggressively in states without triplicate prescription programs, and did not do so in states that had such programs. 4. The basic economic principle in nding the optimal level of deterrence is that people taking an action should internalize the damages that they cause. For an action a 2 0, let B(a) denote the decision maker's benefit, D(a) the external damages caused with D'(a) > 0, p the probability of being fined F(a) with F (a) > 0. There are three problems to consider, . maxazo B(a), . maxazo[B(a) - D(a)], and . maxa>o[B(a) - PF(a)]. What are the relations between the first and the sec- ond problem? The first and the third? What must be true for the second and third to have the same solution? How does this change if p decreases