Question

34)EZJOINT. After spending 10 years and S1.5 billion, you have finally gotten Food and Drug Administration (FDA) approval to sell your new patented wonder drug, which reduces the aches and pains associated with aging joints. You will market this drug under the brand name of EZjoint Market research indicates that the demand elasticity for EZjoint is-1.25 (at all points on the demand curve). You estimate the marginal cost of manufacturing and selling one more dose of EZjoint is S1.
(a) What is the profit-maximizing price per dose of EZjoint?
(b) Would you expect the elasticity of demand you face for EZjoint to rise or fall when your patent expires? Suppose that. after patent expiry, a generic version of EZjoint was introduced in the market (under the chemical name clorophospartane). Reacting to entry, EZjoint decided to increase price
c) Can this behavior be consistent with rational profit maximizing?

Answer 1

a)

b) Elasticity of demand will rise when the patent expires because as the patent expires many producers can easily replicate products as substitutes to ageless, thus this will bring a lot of competition in the market.

c) When demand is more elastic, an increase in price will cause a greater fall in demand for quantity, thus revenue will fall.

        Thus if the patent expires, the company EZ joint decides to increase the price due to which this company loses its product demand. Now this company has to sell its product at $1 because of perfect Equilibrium, so revenue will fall, so the behavior is not perfect maximizing rationally.

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