The SSS Co has a patent on a particular medication. The medication sells for $1 per daily dose and marginal cost is estimated to be a constant at $0.20. Assuming linear demand and marginal cost curves, use this information to estimate the deadweight loss from monopoly pricing if the firm currently sells 1,000 doses per day. Can this loss be justified?
What will be an ideal response?
The firm's Lerner Index equals 0.8 which implies an elasticity of -1.25. To solve for the slope of the demand curve, set -1.25 = (dQ/dp) ? (p/Q) or dQ/dp = -1250. The demand curve is Q = a - 1250p. Since we know that Q = 1000 when p = $1, a = 2250. Thus the demand curve is Q = 2250 - 1250p. This implies that Q would be 2000 if the market were competitive and price were $0.20. The deadweight loss per day is [(1 - 0.20 ) ? (2000 - 1000 )]/2 = $400. This loss can be justified on the grounds that had the patent not been issued, the medication might not exist at all.
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Assume that the government increases spending and finances the expenditures by borrowing in the domestic capital markets. If the nation has low mobility international capital markets and a flexible exchange rate system, what happens to the real risk-free interest rate and the nominal value of the domestic currency in the context of the Three-Sector-Model?
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Between the data lag and the legislative lag falls the __________ lag
A) effectiveness B) wait-and-see C) expansionary D) legislative