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 ($125million 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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