Chapter 14 Application Exercise Part 1

A  No because if they are not guaranteed a patent the firm will be essentially operating in market that is similar to perfect competition.  Thus, they will not earn positive economic profits. In fact, research and development expenses will cause the firm to incur economic losses.

B  No because if they are not guaranteed a patent the firm will be essentially operating in a market that is similar to monopoly. Thus, they will earn positive economic profits. In fact, research and development expenses will cause the firm to earn increased economic profits.

C  Yes because research and development will ensure that they earn positive economic profits.

D  Yes because research and development will ensure that they earn negative economic profits.

A  Yes because a perfectly competitive firm cannot shift the demand curve. Advertising will not only increase fixed costs, but it will allow the firm to decrease the price and quantity sold.

B  No because a perfectly competitive firm cannot affect the demand curve.  Advertising will only increase fixed costs and shift the ATC curve downwards.  This will result in reduced economic profits or cause the firm to incur economic losses. This is why you do not see generic drug manufacturers advertising their drugs.

C  No because a perfectly competitive firm cannot affect the demand curve.  Advertising will only increase fixed costs and shift the ATC curve upwards.  This will result in reduced economic profits or cause the firm to incur economic losses. This is why you do not see generic drug manufacturers advertising their drugs.

D  Yes because a perfectly competitive firm can shift the demand curve. Advertising will not only increase fixed costs, but it will allow the firm to increase the price and quantity sold.