Pharmaceutical Industry

A pharmaceutical company, Drugs 'R Us, develops a new drug that cures a prevalent and previously untreatable condition called hypochondriatus. Drugs 'R Us receives a patent to be the only seller of this drug.

1.Explain why the U.S. gives 17 year patents to companies like Drugs 'R Us. Why is the patent not longer or shorter?

2.Pretend you are working as a consultant for Drugs 'R Us. They hired you to determine their optimal price and quantity of their new drug. You calculate the demand function for the drug to be:P = 100 - 0.05Q. From the demand function, you get that the marginal revenue is: MR = 100 - 0.1Q. According to the accountants for Drugs 'R Us, their total cost is C = 2Qandmarginal cost is:MC = 2. How many pills should Drugs 'R Us sell, and at what price?

3.At your suggested price and quantity, what will the profit be for Drugs 'R Us?

4.Drugs 'R Us follows your advice; they're very happy with your advice and give you a sizeable bonus. When you tell this to your friend, she asserts that the Drugs 'R Us monopoly is "bad for society." Why does your friend feel this way? What would you say in response to your friend?

5.There are some undesirable side effects of the drug if it is not used correctly to treat hypochondriatus. What kinds of regulations can the government impose to minimize the occurrence of these side effects?

6.A very rare condition is discovered that is similar to hypochondriatus but the currently available drug is not effective in treating. Because the condition is rare, Drugs 'R Us does not think the profits will be high enough to recoup their investment cost, even with a patent of any length. What else can the government do to encourage Drugs 'R Us to invest in developing a drug for this condition?