You are the manager of a small pharmaceutical company, Advent Pharmaceuticals, Inc. that received a patent...
You are the manager of a small pharmaceutical company, Advent Pharmaceuticals, Inc. that received a patent on a new drug four years ago. Despite strong sales ($200 million last year) and a low marginal cost of producing the product ($0.50 per pill), your company has yet to show profit from selling the drug. This is, in part, due to the high upfront costs of about $2 billion of developing (R&D) and obtaining FDA approval. As an economist working for Advent, you have estimated that, at current price of $2.0 per pill, the price elasticity of demand for the drug is -2.0.
a. Does the company have a monopoly power on this particular drug? How can we measure the degree of monopoly power? Explain.
b. Based on this information, what can you do to boost profits? Explain.
Homework Answers
A) Im case of monopoly, pricing=MC/(1-1/Ed)=0.5/1-1/2=1
Yes company is having a monopoly power because it can earn Economic profit in in long run.
monopoly power can be measured by markup over cost=P-Mc/Mc=(2-0.5)/0.5=3
b) Price should be reduced to $1 in order to boost profit
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