Suppose your pharmaceutical company,which operates as a monopoly,has a patent on a drug with an estimated price elasticity of demand of 1.2.If the marginal cost of producing each pill is $3,at what price should you sell your drug if profit maximization is your objective?

Question

Quizplus · Accepted Answer

To maximize profit, a monopolist sets the price where marginal revenue equals marginal cost. The formula for price in terms of elasticity is P = MC / (1 - 1/|E|). Here, E = 1.2, MC = $3. So, P = 3 / (1 - 1/1.2) = 3 / (1 - 0.8333) = 3 / 0.1667 = $18.

Suppose Your Pharmaceutical Company,which Operates as a Monopoly,has a Patent