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Market Failure — Market Power · Paper 3 — Free Economics HL Practice Questions

1ChallengeSAQ-LDefinition of market power9 marksPaper 3~14 min
A pharmaceutical firm, MedCorp, holds a patent for a life-saving drug, CardioVive, used to treat a rare heart condition. In 2023, MedCorp sold 200,000200{,}000 units of CardioVive at a price of USD 5000 per unit. The marginal cost of producing each unit is constant at USD 500. Lerner Index=P−MCPIn monopoly: Lerner Index=−1PED\text{Lerner Index} = \frac{P - MC}{P} \qquad \text{In monopoly: Lerner Index} = \frac{-1}{PED}
(a)
Calculate the Lerner Index for MedCorp in 2023. [2 marks]
(b)
Using your answer from (a), determine the price elasticity of demand (PED) for CardioVive and explain what this value implies about consumer responsiveness to price changes. [3 marks]
(c)
Evaluate the extent to which the Lerner Index alone is a sufficient measure of market power for policymakers assessing MedCorp's position. [4 marks]
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