Question 2 Part (a) Consider a
Question 2Part (a) Consider a firm called Health-R-Us that is a monopoly. Howdoes Health-RUsdecide the price to charge and quantity to sell of the good it hasa monopoly on?Illustrate your answer using a fully labelled and explained marketdiagram. AssumeHealth-R-Us is making monopoly profits and illustrate these on thesame diagram. Inaddition, indicate the area on your diagram that illustrates theefficiency cost (thedead weight loss) of the monopoly, and explain why this dead weightloss arises.
Part (b) Assume Health-R-Us is a legal monopoly: it is a monopolydue to legalprotection from the government in the form of a patent issued tothe company.Imagine that the government withdraws the legal protection forHealth-R-Us suchthat the market becomes competitive. Will a typical individual firmin thiscompetitive market make economic profit in the long run? Why or whynot? Use anappropriate firm-level diagram to illustrate and explain youranswer.
Part (c) Your answers to parts 2a and 2b illustrated differentlevels of profit made byan individual firm in both a monopoly market structure and acompetitive marketstructure respectively. In part 2a you also indicated the deadweight loss of amonopoly.Assume now that Health-R-Us has discovered a vaccine forcoronavirus. Why mightthe government be willing to grant (and allow to remain in place) apatent to Health-R-Us, despite the dead weight loss and the ensuring monopolyprofits caused bysuch a patent? Explain your answer. For simplicity assume thevaccine is onlyrelevant for the domestic market (i.e., there is no global marketfor vaccines).
Answer:
A). As a monopoly, it produces a quantity at which marginalrevenue is equal to marginal cost and the balance will maintain.This is the profit maximizing condition.
Market diagram:-
In this diagram, the quantityis Qm and price is Pm.
There is an efficiency cost of the monopoly which represent thewastage of resources when the monopoly does not allow the price tobe equal to the marginal cost.
This shows that market not have allocative efficiency and that’swhy consumer surplus is reduced at the cost of producersurplus.
B). Health-R-US makes profit till the time it had legalprotection form the government and it was in monopoly. It hadfreedom to keep high price as there was no competitor and customerhad no choice. When Health-R-U enters into competitive market willnot be able to enjoy monopoly as there will be more vendors to sellthe product. If it want to be in the market then it has to becomecompetitive and charge price as per the demand and supplyparameter.
C). In this time government decides to announce that the grantwill be provided to the company which finds vacines for thecovid-19.
Many companies started to carry out the research activities andhasting in discovery of new vaccines. Due to the governmentcommentment, the newly discovered vaccine get huge recognition inthe market and this kind of competition will bring many discoveriesin the vaccine research and finally get a solution for that.
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