Deck 13: The Pharmaceutical Industry

Question 1

Suppose you are the manager of drug development at a new pharmaceutical company and you are trying to decide how to price your newly released drug.The drug has a marginal cost of $20 and the demand elasticity for the drug is -2.What is the optimal price?

Answer 1

Price = MC/(1 + 1/-Pe)= $20/(1 + 1/-2)= $20/(1 - .5)= $20/.5 = $40 or 2 times MC

Question 2

Pharmaceutical firms charge different prices in different countries after because

A)Government regulations are different between countries
B)Demand elasticities are different between countries
C)Both a and b
D)Neither a nor b

Answer 2

B
If demand is less elastic,the pharmaceutical company can charge more without losing more consumers.

Question 3

Which policy simplified and streamlined the process for FDA approval of generic drugs in exchange for granting patent extensions to innovative drugs?

A)Hatch-Waxman Act
B)1962 Drug Amendment
C)Medicare Modernization Act
D)None of the above

Answer 3

A
The Hatch-Waxman Act of 1984 reduced the lag time on generic drugs reaching the market by no longer requiring that generic drugs replicate the clinical trials performance by the original manufacturer to prove safety and efficacy.

Question 4

If the demand for Lipitor is P = 1000 - 10Q (MR = 1000 -20Q)in the United States and P = 500 -20Q (MR = 500 - 40Q)in Canada,at what price would Lipitor sell at in each country? Assume marginal cost is equal to $100.

Question 5

The economic rationale for patent protection for prescription drugs is the

A)Creation of a monopoly that will maximize consumer surplus
B)Redistribution of income to wealthy corporations
C)Privatization of a public good to make it excludable
D)Incentive it provides for medical drug innovation

Question 6

Which drug type is expected to have a higher markup over cost?

A)Innovation drugs
B)"Me-too" drugs
C)Both have about the same markup

Question 7

What is the rationale for FDA regulation of drugs?

A)To protect the consumer from dangerous drugs
B)To remedy the lack of information about new drugs among physicians
C)Both a and b
D)Neither a nor b

Question 8

When generic versions enter the market after the patent on a branded drug has expired

A)The branded drug increases market share and price
B)The branded drug increases market share and decreases price
C)The branded drug decreases market share and increases price
D)The branded drug decreases market share and decreases price

Question 9

Research and development (R&D)is considered a _____ because _____:

A)Variable cost;more R&D leads to more quantity produced
B)Variable cost;more R&D leads to higher profits
C)Fixed cost;it does not vary with current output
D)Fixed cost;it is related to advertising

Question 10

For pharmaceutical drugs,R&D expenditures account for

A)Over two-thirds of expenses
B)Between one-third and two-thirds of total expenses
C)Less than one-third of expenses

Question 11

Explain what would happen to the price of drugs,both domestic and abroad,if the United States allowed the reimportation of drugs.

Question 12

Drug after formularies

A)Help manufacturers determine which drugs are efficacious
B)Help salesmen determine what to sell
C)Determine which drugs will be covered by third-party payers
D)Both b and c

Question 13

Suppose there is a new drug in the pipeline that will reduce infant mortality in half from .05 to .025,but the drug will not be approved by the FDA for 3 years.If 10,000 children are afflicted each year,what is the number of statistical deaths that could have been avoided with earlier FDA approval?

Question 14

Which of the following are types of prescription drug advertising?

A)Direct-to-Consumer Advertising (DTCA)
B)Detailing
C)Free samples
D)All of the above

Question 15

Most pharmaceutical drug discoveries fail to lead to a marketable drug due to

A)Abandonment before reaching Phase III trials
B)Abandonment due to failure during Phase III trials
C)Abandonment for economic reasons despite success during Phase III trials

Question 16

Long lags in FDA approval lead to

A)Statistical deaths
B)Less innovation
C)Both a and b
D)Neither a nor b

Question 17

Describe methods used by brand-name pharmaceutical companies to delay the entry of generic drugs.

Question 18

Drugs that treat a small portion of the population are called

A)Small drugs
B)"Me-too" drugs
C)Unique drugs
D)Orphan drugs

Question 19

When a pharmaceutical company sells a patented drug in different countries,we expect

A)A higher price in countries with more price-elastic demand
B)A higher price in countries with less price-elastic demand
C)Similar price across countries (assuming similar MC across countries)
D)Any of the above is likely

Question 20

According to Duggan and Morton,the reduction in overall drug expenditures

A)Is due to a decrease in prices by pharmaceutical companies
B)Is due to an increase in prices by pharmaceutical companies
C)Is due to the ability of private plans to drive the use of drugs toward less expensive therapeutic substitutes
D)Is due to the ability of Medicare Part D plans to drive the use of drugs toward less expensive therapeutic substitutes