Question
Consider the producer of a branded drug that will soon go off patent and compete with generic versions of the drug. The average cost of
Consider the producer of a branded drug that will soon go off patent and compete with generic versions of the drug. The average cost of production is constant at $8 per dose. The producer could prevent the entry of generics by committing to a limit price of $10. At this price, the firm will sell 100 doses per day. Alternatively, the producer could charge a price of $12 and passively allow generics to enter the market. The price elasticity of demand for the branded drug is 2.0.
a. Under the passive approach (price = $12), the quantity of the branded drug demanded is _________________; the firm's profit is __________.
b. Under the entry-deterrence approach, the firm's profit is $__________.
c. The best approach is ___________ (entry deterrence, passive).
d. If the price elasticity of demand for the branded drug were 3.0 instead of 2.0, the profit under the passive approach would be $_________ , so the best strategy is ___________(entry deterrence, passive).
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started