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You head the introduction of a new drug, Prilosec OCD. Prilosec OCD is a version of Prilosec OTC designed for obsessive compulsives with heartburn (exactly 1 pill must be taken every 23 minutes precisely). You estimate that the demand curve is Q=500 -1/2.p. Your cost accountants estimate that your supply curve is Q=-62.5 + 0.625.p.

a. Are these inverted or perverted curves? How can you tell? If not already in inverse form, provide the inverted formulas.

b. Plot both together on a supply-demand graph. Calculate the equilibrium P and Q, and show them on your graph as well. Also calculate CS (consumer surplus) at the equilibrium.

c. What is the elasticity of demand for POTC at equilibrium? The elasticity of supply (uses the same formula as for elasticity of demand, but use the slope of the supply curve)? At this point, if you increased the price slightly, would total revenue increase or decrease? Explain.

Macroeconomics, Economics

  • Category:- Macroeconomics
  • Reference No.:- M9167426

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