ECON 157 Health Economics Problem Set # 3 SOLUTIONS

Document Content and Description Below

Establishing a new drug in the market. Bhattacharya and Vogt (2003) study the pricing strategies of pharmaceutical companies that bring new drugs to market. They observe that new drugs often debut a... t relatively low prices and get more expensive over time. They interpret this strategy as an attempt by the drug company to establish its drug in the minds of doctors and patients before trying to extract monopolistic profits. Recall our fictional drug for carpal tunnel syndrome called BHTn1 which was introduced in Section 12.1. 15. Price controls and induced innovation. Suppose that drugs can be assigned a value W from 0 to 100 that indicates their quality. Perhaps a drug with W = 1 is a hangnail medication that barely works, while a drug with W = 99 is a life-saving cancer treatment. In general, suppose the annual demand for drug i in the nation of Pcoria is as follows: 1. (a) What is the probability that all 4 drugs are unsuccessful if the company pursues all 4? (b) What is the expected cost of each drug conditional on being unsuccessful? [Show More]

Last updated: 1 year ago

Preview 1 out of 15 pages