Question

A proposal has been advanced to limit advertising of pharmaceutical prices to prevent unfair pricing by national chains. You estimate that limits on price advertising will make demand less elastic, changing the price elasticity of demand from -5.63 to -4.43. The marginal cost of a typical prescription is $40. The typical small pharmacy fills 25 prescriptions per day. A typical consumer fills 20 prescriptions per year.

1-What will the economic effects of the limit be on consumers and pharmacists?

2-Who is likely to be the more effective advocate for their position?

Answer 1

Limiting pharmaceutical price advertising will likely make demand less elastic, benefiting pharmacies with higher potential margins. Different strategies for pricing pharmaceuticals are suggested based on elasticity: lower the price for an elasticity above 1, raise it for an elasticity below 1, and keep it the same if elasticity equals 1. For UPS and FedEx, gasoline price elasticity affects operational costs, while bread is classified as an inferior good due to decreased consumption with increased income.

Step-by-step explanation:

The economic effects of limitations on price advertising of pharmaceuticals are twofold. On one hand, they are likely to make demand less elastic, as consumers have less information on prices, which can lead to higher prices and potentially reduced consumption. On the other hand, pharmacists and national chains may benefit from the ability to maintain higher margins without being undercut by advertised prices. With a price elasticity of demand change from -5.63 to -4.43, these restrictions might allow pharmacies to increase prices without losing a significant number of customers.

Regarding who would be more effective in advocating for their position, national chains might have more resources for lobbying and advertising, making them potentially more effective. However, consumer advocacy groups could also be influential if they mobilize widespread public concern about drug prices.

When it comes to pricing advice for a pharmaceutical company, different strategies are recommended based on price elasticity of demand. With an elasticity of 1.4, the firm should lower the price to increase revenues; with an elasticity of 0.6, the firm should raise the price; and with an elasticity of 1, the company should keep the price the same as revenues are maximized.

For UPS or FedEx, the gasoline price elasticity of supply would be critical as it would affect their costs of operations and potentially the pricing of delivery services. A more elastic supply means gasoline prices would be more stable in the face of demand shifts, which benefits these companies by providing predictability in costs.

If the average annual income rises and the quantity of bread consumed falls, we calculate the income elasticity of bread consumption by dividing the percentage change in quantity demanded by the percentage change in income. From the given data, bread would be an inferior good because consumption decreases as income increases.