1.On Amazon.com, there are three versions of Keynes' famous General Theory: a hardcover for $19.13, paperback for $8.60, and a Kindle version for $1.00. There is not much difference in the cost of production between hardcover and paperback books (though there likely is for the Kindle e-book version), but hardcover books do tend to be published earlier than paperback versions of the same book. How do you explain the wide variety of prices for basically the same book?
2. For measuring consumer surplus, recall that area of a triangle = ½ * base * height.
Mirk Labs is a British pharmaceutical company that currently enjoys a patent monopoly in Europe, Canada, and the United States on Zatab (pronounced zay-tab ), an allergy medication. The global demand for Zatab is Qd = 15.0-0.2P
where Qd is annual quantity demanded (in millions of units) of Zatab, and P is the wholesale price of Zatab per unit. A decade ago, Mirk Labs incurred $60 million in research and development costs for Zatab. Current production costs for Zatab are constant and equal to $5 per unit.
a. What wholesale price will Mirk Labs set? How much Zatab will it produce and sell annually? How much annual profit does the firm make on Zatab?
b. The patent on Zatab expires next month, and dozens of pharmaceutical firms are prepared to enter the market with identical generic versions of Zatab. What price and quantity will result once the patent expires and competition emerges in this market? How much consumer surplus annually will allergy sufferers who take Zatab gain?
c. Calculate the annual deadweight loss to society due to the drug firm's market power in Zatab. What exactly does this deadweight loss represent?
d. Given your answer to part c, would it be helpful to society for competition authorities in Europe, Canada, and the United States to limit entry of generic drugs to just five years for new drugs? Why or why not?
3.After considering the situation of market power for Zatab and how it changed after the introduction of generics, consider situations of natural disasters and how governments respond to shortages resulting from them.
a. Read http://lawblog.legalmatch.com/2011/05/05/we-cant-stop-the-twisters-but-we-can-stop-price-gouging/ and comment on why anti-gouging laws can increase social welfare.
b. In contrast, read http://cafehayek.com/2012/11/gouging-reality.html and comment on why anti-gouging laws may not increase social welfare, or at least why they may lead to consequences which are unintended by the government.
c. Which argument do you find more persuasive, and why? I.e., should governments continue to use anti-gouging laws to correct supposed market failures occurring after natural disasters?