N=7 3. ACME's pharmaceutical company considers developing a newvaccine whose demand (in thousands) the company estimates willbe D(p) = (N+2)(100 - p). The R&D investment needed to developthat vaccine is £5 million. The vaccine would be produced at aconstant average cost of £(7N+14). If ACME makes the investmentin R&D, it will obtain an exclusive patent from the government andmonopolise the market. If it does not invest in R&D, ACME willincur no cost.a) Determine whether ACME will invest in R&D to develop thisnew vaccine. If it does, find the equilibrium price and quantity ofthe monopolistic market, the resulting consumer surplus, ACME'sprofit and the Lerner index.b) An NGO has decided to buy the patent from ACME. The NGOonly has £0.6 million to offer ACME for the patent. The NGO plansto finance the rest of the offer needed to buy the patent fromACME with the sales of the vaccine. If the NGO's objective is tomaximise the consumer' surplus, what would be the selling priceof the vaccine? By how much would the consumer surplus increasewith respect to (a)? Does social welfare increase as a result? Byhow much?c) Return to the scenario in (a) but assume that ACME estimatesthat with 50% probability the government will share the patentwith its most hated competitor, BACME, who then would be ableto produce the vaccine also at a constant average cost of £(7N+14).The two firms would then compete a la Cournot. Would ACME makethe R&D investment in the first place?

Market Demand : D(p) = (N + 2 )(100- p ) Where , N = 7 & Let quantity demanded be Q So , Q =…

3. ACME's pharmaceutical company considers developing a new vaccine whose demand (in thousands) the company estimates will be D(p) = (N+2)(100 - p). The R&D investment needed to develop that vaccine is £5 million. The vaccine would be produced at a constant average cost of £(7N+14). If ACME makes the investment in R&D, it will obtain an exclusive patent from the government and monopolise the market. If it does not invest in R&D, ACME will

3. ACME's pharmaceutical company considers developing a new vaccine whose demand (in thousands) the company estimates will be D(p) = (N+2)(100 - p). The R&D investment needed to develop that vaccine is £5 million. The vaccine would be produced at a constant average cost of £(7N+14). If ACME makes the investment in R&D, it will obtain an exclusive patent from the government and monopolise the market. If it does not invest in R&D, ACME will

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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