A product was developed from a university research spinoff and the technology was then licensed to a big pharma company for production. Industry reports estimate that sales of this product in 2020 totaled 20 million doses at a price of $12 each. Now assume that since the product was developed at a university - it has the right to license one more vendor - your firm. They offer the license to your firm for $2 per dose. Your firm investigations suggests that you could produce for $5/dose. The question is whether your costs are low enough to withstand the competition that may arise with the pharma company. You are worried that the royalty to the University may give you higher costs than the pharma company, whose cost structure is kept closely guarded. We know very little other than the elasticity which is available from market research.

Question:

The price elasticity of demand for this medicine is between 2 and 3. 0 Approximate the pharma company's marginal cost based on just this knowledge. (3) 0 What is your estimate of \"expected\" marginal cost if you are willing to assume that there is an 80-20 chance of elasticity being -2 or -3. (3)