Cellphone services in the US wireless voice & data market Answer

  1. Do you think these firms would welcome congressional legislation which restricted the amount that any one firm could spend on advertising to $1 million yearly, and thereby allowed them all to drastically reduce their costs (and thus increasing profits) without fear of losing ground to each other? Explain your answer in both cases.
  2. Assume the graph below represents the market demand for a patented prescription drug together with the long run marginal cost and average cost functions for producing the drug. (note: the diagram assumes that at output levels over 50 million AFC ~ 0, and MC is constant so that ATC = AVC =MC = $20)

A) Draw the marginal revenue function for this firm.

B) What is the profit maximizing price for this firm?

C) On the graph show the area which represents the net loss to society resulting from the monopoly power conferred by the patent.

D)What do you predict will happen to the structure of competition and to the price in this market when the patent expires ?