In 1987, a company called Burroughs-Wellcome introduced its anti-AIDS drug AZT and an...

Question:

In 1987, a company called Burroughs-Wellcome introduced its anti-AIDS drug AZT and an introductory price of $12,000 annually. Suppose the marginal cost of producing an annual dosage of the drug was $100 and that $12,000 was the optimal price. What is effect on the number of annual doses sold of a 10% increase in the price of the drug? Explain how you obtain your answer, showing all calculations.

Optimal price:

The optimal price is calculated as the ratio of marginal cost to elasticity. It rises with the increase in marginal cost, and it falls with a decrease in marginal cost. It means a direct relationship exists between them.

Answer and Explanation: 1


Here

Ed = Elasticity of demand

Per = Percentage

QD = Quantity demanded

P = Price

Optimal Price = OP

{eq}OP = \frac{MC}{1+\frac{1}{Ed}} {/eq}

{eq}12000 = \frac{100}{1+\frac{1}{Ed}} {/eq}

Ed = 1.0084

{eq}Ed = \frac{Per\ change\ in\ QD}{Per\ change\ in\ P} {/eq}

{eq}1.0084 = \frac{Per\ change\ in\ QD}{10} {/eq}

Per change in QD = 10.84

As the price increases by 10 percent then quantity demanded decreases by 10.84 percent.


Learn more about this topic:

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The Elasticity of Demand: Definition, Formula & Examples

from

Chapter 3 / Lesson 7

Understand what elasticity of demand is and discover different types of elasticity of demand. Learn how it is measured and review the elasticity of demand formula.


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