Question

Prior to 1996, Upjohn Company's hair regrowth product, Rogain, required a prescription. It retailed for approximately $50 a bottle (2fl. oz). Then in early 1996 Upjohn obtained approval from the Federal Drug Administration to sell Rogain without a prescription. The retail price was reduced sharply to approximately $30 a bottle. Using the principles of elasticity, draw a demand schedule that justifies Upjohn's decision to cut the price from $50 to $30.

Answer 1

Suppose that when the price was $50 a bottle, the firm was selling 300 bottles so that its revenue were 50 x 300 = $15000. This is shown below

Now the price is reduced to $30 per bottle and the quantity sold increases to 600 bottles. Then, revenue earned is 30*600 = $18000. This is shown below

Note that the decision of reducing the price is justified because the demand becomes elastic in 1996 when Rogain was allowed to be sold without a prescription. When demand is elastic, price fall will increase revenue and this is seen in the diagram also. Hence, the demand schedule should show the demand to be elastic in price range $30 - $50.