Suppose a drug developer just received a patent on a new chemical compound, which could be used in developing a new drug to control cholesterol. The developer knows (with certainty) that it could successfully develop the compound into a safe, effective (and FDA-approved) drug. If it does so, it can expect to earn a profit of $150 million per year from sales of the drug while the drug is under patent. Assume the firm has a 10% discount rate.

a) If developing the new drug will take 14 years, what is the maximum the drug developer should be willing to invest to develop the new drug? Assume the entire R&D investment must be made in year 1. (That is, if the firm invests $C in year 1, they stand to earn $150m annually from year 15 through year 20. Your job is to calculate C.)

b) If developing the new drug will take 12 years, what is the maximum the drug developer should be willing to invest to develop the new drug?

c) Observers often criticize the FDA's slow process for approving new drugs. Identify two problems that are created if the drug approval process is unnecessarily slow.