Question

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.

Answer 1

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