You are the manager of a small pharmaceutical company that received a patent on

Question

You are the manager of a small pharmaceutical company that received a patent on a new drug three years ago. Despite strong sales ($125 million last year) and a low marginal cost of producing the product ($0.25 per pill), your company has yet to show a profit from selling the drug. This is, in part, due to the fact that the company spent $1.2 billion developing the drug and obtaining FDA approval. An economist has estimated that, at the current price of $1.25 per pill, the own price elasticity of demand for the drug is -2.5. Based on this information, what can you do to boost profits? Explain.

Explanation / Answer

Price elasticity of demand of -2.5 means that if price is reduce by 1%, demand will increse by 2.5%So we can see from the facts given in the question that the cost of producing is just $0.25 but the sale price is $1.25, so the company should reduce the price of its product as it has the cushion margin of $1 per pill. Increased demand will lead to increase in sales and ultimately the company will experience profits

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