4 After spending 10 years and 15 billion you have finally go

4. After spending 10 years and $1.5 billion, you have finally gotten Food and Drug Admin- istration (FDA) approval to sell your new patented wonder drug. You will market this drug under the brand name of Ageless. Market research indicates that the elas- ticity of demand for Ageless is constant at 1.25. You estimate the marginal cost of manufacturing and selling the drug is $1.

Solution

The firm is now a monoply and so it will charge a price according to the rule P = MC * (e/e + 1)

a) Profit maximizing price is found as P = MC * (e/e + 1)

P = 1*(-1.25/-1.25 + 1)

= 1*(-1.25/-0.25)

= $5. This is the profit maximizing price

b) When the patent expires, more firms will start producing the drugs so the elasticity value will increase in absloute terms showing that it will rise and demand becomes more elastic.