What is the Profit-Maximizing Price per Dose of Age
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(a) Suppose you are the owner of a company with a patent approval to sell a new drug that reduces
back pains associated with aging. You will market this drug under the brand name Xage.
Market research indicates that the price elasticity of demand for Xage is -1.25 (the same at all
points on the demand curve). You estimate that the marginal cost of manufacturing and selling
one more dose of Xage is €1.
i. What is the profit-maximising price per dose of Xage? Explain
ii. Would you expect the price elasticity of demand your company face for Xage to rise or fall
when the patent expires? Why?
iii. Suppose that, after patent expiry, a generic version of Xage was introduced in the market.
Reacting to entry, your company decided to increase price. Can this behaviour be consistent with profit maximising? Explain.
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