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 ($150 million last year) and a low marginal cost of producing the product ($0.50 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 $1.7 billion developing the drug and obtaining FDA approval. An economist has estimated that, at the current price of $1.50 per pill, the own price elasticity of demand for the drug is -2. Based on this information, what can you do to boost profits? Explain with proper calculations.

Explanation / Answer

Reduce the Price. This is because the demand is relatively elastic thus, a small decrease in price will cause a double increase in demand. This will increase the total revenue hence profits.

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