BioMed Pharmaceutical has held a patent on an important heart medication called

Question

BioMed Pharmaceutical has held a patent on an important heart medication called Heartex, but the patent will expire in the coming year. After the patent expires, other firms can legally sell the same medication as a generic drug product. What will happens to the demand for Heartex and to the Lerner index for this product as the generic drugs enter the market?

A) Demand becomes less elastic, Lerner index increases

B) Demand becomes less elastic, Lerner index declines

C) Demand becomes more elastic, Lerner index increases

D) Demand becomes more elastic, Lerner index declines

Please explain your answer, thank you!

Explanation / Answer

Since BioMed Pharmaceutical has held a patent on an important heart medication called Heartex, but the patent will expire in the coming year. After the patent expires, other firms can legally sell the same medication as a generic drug product. Then the elasticity of demand for Heartex will be more because now there is more firm which supplies the Heartex.

Since the elasticity has been increased, so the Leaner index will decrease. This is because the learner index of monopoly is calculated as;

Learner index of monopoly = 1/ Elasticity

Since elasticity is in denominator, therefore when elasticity increases, the learner index of monopoly decreases.

Hence option D is the correct answer.

Option D is; Demand becomes more elastic, Lerner index declines

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