VetPharm has historically produced and sold drugs for animals; however, one of i
ID: 1176265 • Letter: V
Question
VetPharm has historically produced and sold drugs for animals; however, one of its products developed for animal use has recently been approved for a similar use in humans. Market research has revealed that that at the current per dose price, the elasticity of demand on the part of animal owners is -2.0. The research also estimates that at this price the elasticity of demand for human use would be -.2. The current price is $5.00 per dose. If the MC of production is $1, what should the company do?
a. reduce animal price; reduce human price.
b. raise animal price; raise human price.
c. reduce animal price; raise human price.
d. raise animal price; reduce human price.
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Explanation / Answer
When demand is elastic (absolute value >1) raising price decreases revenues and when it is inelastic (absolute value between 0 and 1) raising prices increases revenues. So it should reduce price for the animals (where demand is elastic) and raise price for humans (where demand is inelastic). (c)
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