Suppose that it would cost a firm $9 million to develop a new drug. In the absence of a patent, other firms will be able to copy and bring to market a generic equivalent of the drug in three years. In each of these three years, the firm would earn monopoly profits of $4 million. A patent will generate monopoly status for the firm for twenty years. If the government knew this information ahead of time, which of the following is most correct?
A)The government should grant a patent to the firm, because the firm would not produce the drug at all without a patent.
B)The government should grant a patent to the firm, because it does not have the resources to determine on a case-by-case basis exactly which inventions merit award of the patent.
C)The government should grant a patent to the firm, because even with a patent the firm will not earn a monopoly profits.
D)The government should not grant a patent to the firm, because the firm would earn sufficient profits to develop the drug without the patent.

Question

Quizplus · Accepted Answer

The firm would earn $12 million in monopoly profits over three years without a patent, which is sufficient to cover the $9 million development cost.

Suppose That It Would Cost a Firm $9 Million to Develop