Draw an appropriate hypothetical market diagram

Reference no: EM133395918

Question: Economic theories suggest that the profitability of a firm depends on its pricing power in the market. Drug companies in the US are an example of firms that have substantial profitability, according to the following articles:

• Langreth¸ Robert. (2022) "Drug Prices." Bloomberg. September 17.

• Emanuel, Ezekiel J. (2019) "Big Pharma's Go-To Defense of Soaring Drug Prices Doesn't Add Up: Just how expensive do prescription drugs need to be to fund innovative research?" The Atlantic. March 23.

• Entis, Laura. (2019) "Why Does Medicine Cost So Much? Here's How Drug Prices Are Set." Time. April 9.

(i) Based on economic theory concerning market structure and the discussions in the news articles, draw an appropriate hypothetical market diagram of a profit-maximising pharmaceutical firm. Clearly indicate the hypothetical price and quantity set by the firm and the size of profit earned by the firm. Examine carefully why big pharmaceutical firms in the US have the market power to raise prices without losing too many consumers. Refer to key sentences and ideas from the articles where relevant to support your analysis.

(ii) The demand curve for a pharmaceutical firm which produces a patented drug in the market is P = 36-Q and its cost function is TC=Q2 +12Q+24, where Q is measured by using millions of tablets of this drug and P is the price of the drug ($ per gram). Calculate the profit-maximizing price and quantity of the firm. Appraise the consumer surplus, producer surplus and deadweight loss in the market and the size of profit that the firm can earn. Solve your analysis with a proper diagram

Reference no: EM133395918

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