Answer to Question #109414 in Economics for khush

Question

Let’s say that the price elasticity for a pharmaceutical product is -0.3 among low-income patients and -0.05 for all other income group patients. Let’s also say that total consumption for this product is 100,000 scripts per year for low-income patients and 200,000 scripts per year for other patients.

A pharmaceutical company is considering increasing the price patients pay by 10%

(a) What will be the impact (in percentage terms) on pharmaceutical consumption among low income and other income patients.

(b) If the original price for the product was $10 for low income patients and $30 for high income patients, what will be the impact of the 10% price increase on total revenue of the pharmaceutical product?

Answer 1

(a) pharmaceutical consumption among low income and other income patients will decrease by $10×(-0.3) = -3$ % and $10×(-0.05) = -0.5$ % respectively.

(b) If the original price for the product was $10 for low income patients and $30 for high income patients, then the 10% price increase will increase total revenue of the pharmaceutical product.