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Generic Competition is discussed.

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The Federal Trade Commission seeks to ensure that the process of bringing new low-cost generic alternatives to the marketplace and into the hands of consumers is not impeded in ways that re anticompetitive. To illustrate the potential for economic profits from delaying generic drug competition for one year, consider cost and demand relationships for an import brand-name drug set to lose patent protection:

TR = $10.25Q - $0.01Q2
MR = â??TR/â??Q = $10.25 - $0.02Q
TC = $625 + $0.25Q + $0.025Q2
MC = â??TC/â??Q = $0.25 + $0.005Q

Where TR is total revenue, Q is output, MR is marginal revenue, TC is total cost, including a risk-adjusted normal rate of return in investment, and MC is a marginal cost. All figures are in thousands.

A. Set MR=MC to determine the profit-maximizing price-output solution and economic profits prior to the expiration of patent protection.

B. Calculate the firmâ??s competitive market equilibrium price-output solution and economic profits following the expiration of patent protection and onset of generic competition.

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Solution Preview

Note, in the question, MC is calculated incorrectly (may it is a typo).

MC = d(TC)/dQ = 0.25 + 0.05Q

MR = 10.25 - 0.02Q = 0.25 + 0.05Q = MC, solving this equation gives Q = 142.86.

Profit = TR - TC = ...

Solution Summary

Generic Competition is discussed.