Q. Generic Competition. The Federal Trade Commission seeks to ensure that the

process of bringing new low-cost generic alternatives to the marketplace and into the hands

of consumers is not impeded in ways that are anti-competitive. To illustrate the potential

for economic profits from delaying generic drug competition for one year, consider cost and

demand relationships for an important brand-name drug set to lose patent protection:

1T R=10.5Q-0.02Q2

MR=T R/Q=10.5-0.04Q

T C=800+0.5Q+0.005Q2

MC=T C/Q=0.5+0.01Q

where T R is total revenue, Q is output (in thousand), MR is marginal revenue, T C is total

cost, including a risk-adjusted normal rate of return on investment, and MC is marginal

cost. All figures are in thousands.

(1). Set MR=MC to determine the profit-maximising price/output solution and eco

nomic profits prior to the expiration of patent protection. (20 points)

(2). Calculate the firm's competitive market equilibrium price/output solution and eco

nomic profits following the expiration of patent protection and onset of generic competition.

(30 points)