Suppose that a new drug has been approved to treat a life-threatening disease. The demand for that drug is shown on the graph below. Prior to approval of this drug, the only treatment for this condition was any one of several non-prescription, or over-the-counter, pain relievers. The demand for one brand of the several non-prescription pain relievers is also shown on the graph.
a) Identify the demand curves for the new drug and one brand of the over-the-counter pain relievers in the figure.
b) Compute the elasticity of demand for each drug at p=$15, assuming that for both demand curves, the quantity demanded at this price is 250. Consider a price rise from $10 to $15. At p = $10, quantity demanded for demand curve A is 267, and for demand curve B this quantity is 375.
c) Which producer should consider a reduction in price to increase sales? Why?
d) Why demand curve A is steeper than demand curve B?