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Download Answers for HW5 #9.2 a The firm maximizes profit by setting
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AnswersforHW5 #9.2 a Thefirmmaximizesprofitbysettingmarginalcosttomarginalrevenueinboth markets.MC MRA MRB,whereMRArepresentsmarginalrevenuefrom countryAandMRBrepresentsmarginalrevenuefromcountryB. TRA 84x‐2x2 MRA dTRA/dx 84‐4x TRB 124x‐3x2 MRB dTRB/dx 124‐6x MRA MC,84‐4x 4,weobtainx 20forcountryA; MRB MC,124‐6x 4,weobtainx 20forcountryB. Thenweobtainp 44forcountryAwhenx 20. p 64forcountryBwhenx 20. b εA dxA/dpA pA/xA ‐0.5 44/20 ‐1.1 εB dxB/dpB pB/xB ‐0.33 64/20 ‐1.06 c ThepriceelasticityincountryA inabsoluteterms islargerthanincountryB. Thus,theoptimalpriceincountryAislowerthanthatincountryB,whichis consistentwithRamseyoptimalpricing. #9.5 Thedecreaseindevelopmentcostsimpliesadecreaseintheusercostofcapital, whichinturnleadstoanincreaseintheoptimalamountofR&Dinvestmentby thepharmaceuticalfirms,accordingtotheframeworkunderlyingFig.9.1.For example,ifdevelopmentcostfallsbelow50%,e.g.,from8millionto4million dollarsduetotheapplicationofpharmacogenomics,thepharmaceuticalfirm maynotrelyonexternalfunds suchasloansfromabank tofinancethe developmentcost.Rather,internalfundsaresufficientforthepharmaceutical firmtofinancethedevelopmentcost.Sincetheusercostofcapitalisoftenlower forinternalfundsthantheexternalfundsifthecapitalmarketisimperfectly competitive,thentheshiftfromexternalfundstointernalfundsinfinancingthe costofdrugdevelopmentwouldreducetheusercostofcapitalforR&D investment.
