Suppose a drug company, PharmInc, has historically produced and sold drugs for veterinary use; however, one of its products has recently been approved by the FDA for a similar use in humans. The drug is not over‐the‐counter but rather must be prescribed by a physician or veterinarian. The company’s market research indicates that at the current price per dose price, the elasticity of demand on the part of animal owners is ‐3.0. The research also estimates that at this price the elasticity of demand for human use would be ‐1.4. Currently the drug is sold in the animal market for $1.80 per dose.

a. Why might the elasticity of demand be different for the same product when it has different uses? Your answer should also be relevant to this market.

b. Suppose the firm is optimally pricing the drug according to its MC and elasticity of demand in the animal market. With a price of $1.80 per dose, what is the current MC of producing one dose?

c. Once PharmInc starts producing for both markets, PharmInc believes the MC will decrease by 20% per dose. What should the company do? (Should they simply decrease the price by 10% for humans and animals alike? Be specific in your answer. What price(s) should they charge?)

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Step 1 of 1 a SolaPrice elasticity of demand is fundamentally about substituteslf its easy to find a ... View the full answer