The cost of researching and developing a new drug are fixed with respect to the number of units produced. Luna Pharmaceutical would like to sell drugs to poor countries "at cost." Suppose that Luna is subject to the fixed cost fallacy and calculates the cost of the drugs as the average cost, which includes the average fixed cost. What is a consequence of the fallacy?

Question

Quizplus · Accepted Answer

Luna Pharmaceutical, by including the average fixed cost in their calculation of "at cost" pricing, would spread the fixed costs over the units sold, leading to a higher price per unit as they attempt to recover the fixed costs with each sale. This results in over-pricing the drugs to poor countries, as the marginal cost (the cost of producing one additional unit) does not actually increase with each unit produced.

The Cost of Researching and Developing a New Drug Are