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Question: note company is operating as a monopoly as it...

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Note : company is operating as a monopoly as it is the inventor of the drug.


q1. Suppose a company has invented and patented a new pain relief drug. The marginal cost of producing the drug is constant: .  Suppose this drug is not covered by any insurance plan and the market demand is as follows:


a)     How much should the firm charge per unit to maximise its profit? What is the equilibrium quantity?  

(5 points)


b)    Suppose the drug is now covered by public insurance plans with a co-insurance rate of 50% and everyone is eligible. What is the new demand curve? What price should the company charge and what is the equilibrium quantity? How do these market outcomes compare with those in (a)?

   (15 points)


c)     In light of the above analyses, please discuss how private health insurance affects the incentives to innovate in healthcare sectors.  


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