A prescription drug is produced in the United States and sol

A prescription drug is produced in the United States and sold internationally. Each unit of the drug costs $60 to produce. In the German market, you sell the drug for 150 euros per unit. The current exchange rate is 0.667 U.S. dollars per euro. Current demand for the drug is 100 units, and the estimated elasticity is 2.5. Assuming a linear demand curve, determine the appropriate sales price (in euros) for the drug.

Solution

Production cost = $60 / 0.667 = 90 Euros

As per Lerner criterion,

Markup over marginal cost = 1/e [e: Price elasticity of demand]

= 1/2.5

= 0.40, or 40%.

So, appropriate Lerner mark-up over cost = 40% x 90 euro = 36 Euros

So, appropriate price (based on Lerner index) is (90 + 36) = 126 Euros.