Answer to Question #201635 in Microeconomics for shah wasiq

Question

QUESTION 5

MonoMed, having a Patent on production of a medicine, has following Demand and Cost Schedule :

Price (Rs ) 12 11 10 9 8 7 6 5 4 3

Quantity 0 1 2 3 4 5 6 7 8 9

TVC ( Rs ) 0 13 16 20 25 31 38 46 56 68

Where Fixed Cost is Rs 5

e. How would you define the market structure of MonoMed? What are the characteristics? Does the firm have pricing power? (1 Mark)

Answer 1

The main objective of any firm is to maximize its profit and a firm maximizes its profit by producing at an output level where the marginal revenue of the firm becomes equal to the firm's marginal cost of production. The marginal revenue refers to the extra revenue a firm is able to generate when it produces and sells one more unit of output in the market. The marginal cost is defined as the additional cost a firm is required to incur when it produces one more unit of output.

At the profit-maximizing output level, the difference between the total revenue and the total cost of the firm becomes maximum. A firm is making positive economic profits when the market price of the product the firm is producing becomes more than the average cost of production and on the other hand, the firm is said to be making losses when the market price of the product the firm is producing becomes less than the average cost of production.

As Monomed is having a patent on some medicine production then it means that Monomed is the only firm that is able to produce that medicine in the market. The protection of the medicine produced by the Monomed by the patent is seen as the legal barrier to entry because the existence of patent right prevents other firms from entering into the market in which the Monomed is operating.

As we can see from the demand schedule given in the question when the price of the medicine increases then the quantity demanded of medicine decreases and it indicates that the Monomd faces the downward-sloping demand curve for its product. As Monomed is facing the downward sloping demand curve for its product then it means that this Monomed firm has the pricing power because Monomed firm faces no competition and if Monomed increases the price of its patented medicine then it is going to lose some of its customers but not all of its customers because no other firm in the market is producing the patented medicine produced by the Monomed.

So we can say that Monomed is a monopoly firm because it the sole supplier of the patented medicine in the market and faces a downward-sloping demand curve for its medicine.

The characteristics of Monomed firm are

1. Existence of legal barriers to entry
2. Downward sloping demand curve.