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Question: Economics 160 Spring 2017 Homework #4 Note: Questions 3 and 4 printed on the back side of this sh...
Question: Economics 160 Spring 2017 Homework #4 Note: Questions 3 and 4 printed on the back side of this sh...

Show transcribed image text Economics 160 Spring 2017 Homework #4 Note: Questions 3 and 4 printed on the back side of this sheet. [1] Pharmaceutical companies have sometimes utilized "pay-to-delay" deals to keep generic drug companies from entering the market. Essentially, such deals involve incumbent pharmaceutical producers paying generic drug producers money to stay out of the market (i.e, not produce a competing generic case appearing before the Supreme Court recently, the court ruled that the govemment has a right to scrutinize such deals, since the govemment claims such deals keep cheaper forms of medication out of the market. You will analyze this issue in this problem Consider the following scenario: An incumbent drug producer (A) has a cost advantage over another drug producer (B), who is contemplating entering the market by producing a competing drug. Indeed, suppose A and B's total costs are given by: A: TCA 10QA where QA s the quantity A produces B: TCa 20Qu, where Qa is the quantity B produces Also, suppose the market demand is Q 200 2P, where Q is the market quantity and P is the market A. Initially, suppose A is an incumbent monopolist (i.e., B is currently not in the market), what is the monopoly price, quantity, and profit? Invoking the Sylos Postulate, how much would B want to produce (i.e., B enters the market) if A stuck to the monopoly quantity? What would be A's profit if B entered the market? Now, what would be the limit price A could set to keep B out of the market? What is A's profit at this limit price? Is this a case of blockaded entry, effectively impeded entry, ineffectively impeded entry, or free entry? Explain B. Instead, what if A considered a "pay-to-delay" deal with B? That is, suppose A considered paying B some money to not enter the market. At minimum, how much money would A have to pay B to keep out of the market? If A wishes to keep B out of the market, is it better for A to limit price or to "pay-to-delay"? Suppose the govemment scrutinizes A's behavior, thereby leading A not to attempt to deter B from entering the market. Now with both firms in the market, if A and B formed a cartel, what should be the quota level of output for each firm? What would be each firm's profit at these quotas? lfA stuck to its quota, would B want to stick to its quota? If not, how much would B want to produce? [2] Suppose Lucy, Ricky, Fred, Ethel, and Little Ricky are each thinking of buying a Porsche from Pauls Porsche Panorama, a local dealership. Suppose the choice available to each of these five consumers is to buy one car or not buy a car. Lucy's reservation price is $55,000. Ricky's reservation price is $50,000. Fred's reservation price is $45,000. Ethel's reservation price is $40,000, and Little Ricky's reservation price is S35,000. Suppose each Porsche cost the dealership $30,000 (That is, the average cost equals the marginal cost equals S30,000.). If the dealership wishes to sell five cars, without price discrimination what would it profits equal? If instead, the dealership can sell the five cars using first degree price discrimination, what would its profits equal? Show your work.

Economics 160 Spring 2017 Homework #4 Note: Questions 3 and 4 printed on the back side of this sheet. [1] Pharmaceutical companies have sometimes utilized "pay-to-delay" deals to keep generic drug companies from entering the market. Essentially, such deals involve incumbent pharmaceutical producers paying generic drug producers money to stay out of the market (i.e, not produce a competing generic case appearing before the Supreme Court recently, the court ruled that the govemment has a right to scrutinize such deals, since the govemment claims such deals keep cheaper forms of medication out of the market. You will analyze this issue in this problem Consider the following scenario: An incumbent drug producer (A) has a cost advantage over another drug producer (B), who is contemplating entering the market by producing a competing drug. Indeed, suppose A and B's total costs are given by: A: TCA 10QA where QA s the quantity A produces B: TCa 20Qu, where Qa is the quantity B produces Also, suppose the market demand is Q 200 2P, where Q is the market quantity and P is the market A. Initially, suppose A is an incumbent monopolist (i.e., B is currently not in the market), what is the monopoly price, quantity, and profit? Invoking the Sylos Postulate, how much would B want to produce (i.e., B enters the market) if A stuck to the monopoly quantity? What would be A's profit if B entered the market? Now, what would be the limit price A could set to keep B out of the market? What is A's profit at this limit price? Is this a case of blockaded entry, effectively impeded entry, ineffectively impeded entry, or free entry? Explain B. Instead, what if A considered a "pay-to-delay" deal with B? That is, suppose A considered paying B some money to not enter the market. At minimum, how much money would A have to pay B to keep out of the market? If A wishes to keep B out of the market, is it better for A to limit price or to "pay-to-delay"? Suppose the govemment scrutinizes A's behavior, thereby leading A not to attempt to deter B from entering the market. Now with both firms in the market, if A and B formed a cartel, what should be the quota level of output for each firm? What would be each firm's profit at these quotas? lfA stuck to its quota, would B want to stick to its quota? If not, how much would B want to produce? [2] Suppose Lucy, Ricky, Fred, Ethel, and Little Ricky are each thinking of buying a Porsche from Pauls Porsche Panorama, a local dealership. Suppose the choice available to each of these five consumers is to buy one car or not buy a car. Lucy's reservation price is $55,000. Ricky's reservation price is $50,000. Fred's reservation price is $45,000. Ethel's reservation price is $40,000, and Little Ricky's reservation price is S35,000. Suppose each Porsche cost the dealership $30,000 (That is, the average cost equals the marginal cost equals S30,000.). If the dealership wishes to sell five cars, without price discrimination what would it profits equal? If instead, the dealership can sell the five cars using first degree price discrimination, what would its profits equal? Show your work.