Question

1. A pharmaceutical company raises the price of one of its drugs from $2/dose to

$3/dose. The quantity sold falls from 10,000 doses/day to 8,000 doses/day.

1. a. Calculate the price elasticity of demand to two decimal places.
2. If the pharmaceutical company had simultaneously reduced the price of a substitute drug, would your estimate in (a) over- or underestimate the true price elasticity of demand. (Use absolute values for the elasticities to answer this question.)
3. If the pharmaceutical company had simultaneously reduced the price of a complement drug, would your estimate in (a) over- or underestimate the true price elasticity of demand. (Use absolute values for the elasticities to answer this question.)

Answer 1