Question

If the price of pharmaceuticals is regulated, this will most likely a. Reduce demand and reduce...

If the price of pharmaceuticals is regulated, this will most likely

a.

Reduce demand and reduce R&D

b.

Reduce demand and increase R&D

c.

Increase demand and reduce R&D

d.

Increase demand and increase R&D

e.

Have no effect on demand or R&D
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Answer #1

The price ceiling is a legal maximum price which can be charged by the sellers and it is set below the equilibrium price. The price ceiling imposed by the government leads shortage of goods.

If price ceiling is set below the equilibrium price, then it will be binding and if it is set above the equilibrium price, then it will be not binding.

If the price of pharmaceuticals is regulated, then price of it will be below the equilibrium price which would create the excess demand. Hence demand for it will increase. Since price is regulated and it is below the equilibrium price, so producer has less incentive for investment on the research and development of pharmaceuticals. Hence Research and development will decrease.

Hence it can be said that if the price of pharmaceuticals is regulated, this will most likely
Increase demand and reduce R&D.

Hence option c is the correct answer.

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