Under Obama Care (the Affordable Care Act), sellers or importers of medical devices pay a tax of 2.3% (of the price paid). Suppose annual U.S. market demand is expected to be Q = 10000-10P for a device your biomedical startup firm has patented and received FDA-approval. Costs to develop the device were $5 million and marginal costs are constant at $200 per unit. Fixed costs per year are $100,000. The device is not covered by health insurance (i.e., consumers must pay the full price).

(a) If the tax is repealed, how many devices should you sell per year? What price should you charge? What will be your annual profits?

(b) If the tax is implemented, how many devices should you sell per year? What price should you charge?

(c) Do you think the tax will reduce innovations in the biomedical device industry? Explain.

(d) Now suppose the tax is repealed and health insurance covers the device, so that consumers only pay 20 percent of the price (i.e., the copay" is 20 percent and the insurance company covers the other 80 percent). How many devices should you now sell? What is the price? How much do consumers pay for their copay?