Question

Currently it is illegal to import prescription drugs into the United States despite the fact that U.S. consumers could buy drugs from Canada at lower prices than those available in the United States. What set of cost curves is most consistent with the price differential between the United States and Canada?

A.Producing a drug has a high and constant marginal cost.
B.Producing a drug has a low fixed cost and a rising marginal cost.
C.Producing a drug has a low fixed cost with a relatively high marginal cost.
D.Producing a drug has a high fixed cost with a relatively low marginal cost.

Answer 1

The set of cost curves that is most consistent with the price differential between the United States and Canada is D) producing a drug has a high fixed cost with a relatively low marginal cost.
The development costs are fixed and high. The actual manufacturing cost of most drugs is quite small, which is why the firms are able to sell the drug at lower prices in Canada and still earn a profit.