Question

In: Economics

a) Graphically portray supply and demand for a virus drug. Indicate what happens when the prices...

  1. a) Graphically portray supply and demand for a virus drug. Indicate what happens when the prices are arbitrarily set either high or low.

b) On another graph, demonstrate what happens to price and quantity of the virus drug in the short term and long term if the drug cures the virus.

Solutions

Expert Solution

a. In the first scenario it is assumed effectiveness of the drug is not known since in the second case drug cures virus certainly. In the first case supply is inelastic since with rise in price, production of drugs cannot be raised proportionately. Demand is more elastic since effectiveness is not known. High price floor creates excess supply of the drug, whereas price ceiling creates shortage of the drug in the market.

b. When the drug certainly cures the virus elasticity of demand falls as no matter what the price is people would try to buy it. Elasticity of supply remains same on the lower side. In the long run when supply becomes more elastic as production can be adjusted according to price and when many people get cured in the long run elasticity of demand falls.

Rahul Sunny answered 9 months ago
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