Average annual growth for variable X = , where n is time period.
The authors discuss the possibility that advertising reduces a consumer’s price elasticity of demand and will therefore lead to an increase in prices. Using economic theory, explain why advertising can reduce the price elasticity of demand for a good or service.
2. Why might the FDA tend to delay the drug approval process? Explain your answer in terms of type 1 and type 2 errors.
3. A pharmaceutical company has a patent for a new allergy medicine, Drug X. There is another drug already on the market, Drug Y, which can be used to treat the same symptoms. Use the table below to answer the following:
a. After some time on the market, the company producing Drug X is able to get it accepted on formulary lists of insurance companies so that consumers now typically pay only $10 out-of-pocket versus a $40 retail price for the drug. What is the cross-price elasticity of demand between Y and X in that price range?
b. Would you describe Drug X as a product monopoly in this market?
c. If you were an FDA commissioner, would this information enable you to judge whether Drug X had passed the “efficacy requirement” for introduction of new drugs onto the market? Explain your reasoning.
|Price of X (30 tablets)||Quantity of Y demanded|
4. Instead of the phenomenon illustrated in Figure 11.1, illustrate what some researchers have found instead. That is, show what will happen to the price of the brand-name drug when a generic drug is introduced and the producers of the brand-name drug decide to compete with the generics for market share. Make sure to fully illustrate the graph (see figure 11.1) to show what happens after the generic is in the market and producers of the brand-name drug decide to compete.