A brand-name pharmaceutical can increase its price on a drug after its patent on
ID: 1173465 • Letter: A
Question
A brand-name pharmaceutical can increase its price on a drug after its patent on that drug expires, if
Hint: Think about which group of customers would more likely to pay the higher price, the elastic or the inelastic group?
all the customers of this drug are price sensitive.
the marginal cost of producing this drug increases.
the demand for the drug becomes highly elastic.
this drug has a group of loyal customers with generous insurance plans.
A.all the customers of this drug are price sensitive.
B.the marginal cost of producing this drug increases.
C.the demand for the drug becomes highly elastic.
D.this drug has a group of loyal customers with generous insurance plans.
Explanation / Answer
If the pharmaceutical increases it's price to increase revenue, that will be possible only when all the customers of this drug are less price sensitive. That is, when price increases, the group of customers who have inelastic demand will buy the drug by paying higher price.
The group of loyal customers with generous insurance plans are the group that has inelastic price elasticity of demand, i.e. even if the price increases, that will not affect the quantity demanded by greater amount. This group of consumers are loyal plus their insurance plans will cover the increased cost of the drug. So, they are less price sensitive and this will help the pharmacy to increase revenue by increasing price.
Answer-option D
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