Question

Based on the ratio of the optimal advertising expenditure to sales condition proposed by  Dorfman and Steiner(1954 ), Which of the following prescription drugs are likely to receive relatively high advertising budgets from their parent pharmaceutical companies?

		New branded drugs for treating chronic disease.
		New branded drugs for treating acute disease.
		Generic drugs for treating chronic disease
		Generic drugs for treating acute disease.

Answer 1

As per the optimal advertising condition, the sales revenue can be increased by lowering the price, or by advertising more. The effect of higher advertising depends on how elastic the Qd for the good is, with respect to higher advertising. If this elasticity is high, then the firm can charge a higher margin, justified by more expenditure on advertising.

Of the given options, sales generic drugs will have no major effect of advertising. They are unbranded and due to the competitive nature of the market, consumers have all the information required.

Further, drugs for treating acute disease have inelastic demand, which won't be affected by advertising.

Only new brands for chronic diseases will have elastic demand, which will be affected by advertising. This is because there are many similar brands, and even generic drugs available.

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Thus, the category that will be influenced by advertising and will receive high budgets is:

New branded drugs for treating chronic disease.