The global pharmaceuticals giant, DrugCo, has had great success with Xamoff, and over-the counter medicine that reduces exam-related anxiety. A patent currently protects Xamoff from competition, although rumors persist that similar products are in development. Two years ago, DrugCo sold 25 million units for a price of $10 for a package of ten. Last year it raised the price to $11, and sales fell to 22 million units.
a. DrugCo is considering a further price increase to $12. Estimate the impact on the quantity sold. Do you expect revenue to increase or decrease?
b. A financial analyst estimates the cost of production at $2 a package. What price maximizes DrugCo's profit?
c. When the patent expires in 2013, what do you expect to happen to demand? What about the elasticity?