Question

In: Economics

2. a. Using the concept of price elasticity of demand, explain the conditions under which it...

2. a. Using the concept of price elasticity of demand, explain the conditions under which it would be rational for pharmaceutical companies to reduce the supply of drugs. Explain carefully. (10 points)

b. Under the conditions you have identified, what do you think the appropriate response of the government should be? Explain your answer.

Solutions

Expert Solution

a. The price elasticity of demand for medicinal products that are required is inelastic because it is difficult for consumers to survive without them. A significant price rise does not impact their demand. The market for luxury drugs is primarily dynamic, meaning that the price of such drugs varies. Consequently, essential medicines are a must. Through this way, we can see that the availability of luxurious drugs with a significantly elastic demand is rational for Pharmaceutical Companies. It can be done by increasing dramatically the price of these luxury drugs and raising their requirements. This time the supply of such drugs may be cut by these pharmaceutical firms.

b. The government should insure that a reduced allowance does not mean the hoarding of those medicines that fall under the category luxury medicines, under the circumstances under which the pharmaceuticals agree to reduce supply. The government should encourage these pharmaceutical copyrights to change the way critical drugs are produced because the updated suuply often means reduced demand.

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