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Lerner's Index

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Recently, Pfizer and Warner-Lambert agreed to a $90 billion merger, thus creating one of the world's largest pharmaceutical companies. Pharmaceutical companies tend to spend a greater percentage of sales on R&D activities than other industries. The government encourages these R&D activities by granting companies patents for drugs approved by the Federal Drug Administration. For instance, Pfizer-Warner-Lambert spent large sums of money developing its popular cholesterol-lowering drug, Lipitor, which is currently protected under a patent. Lipitor sells for about $3 per pill. Calculate the Lerner index if the marginal cost of producing Lipitor is $0.30 per pill. Does the Lerner index make sense in this situation? Explain.

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Lerner's Index = P-MC/P = 3-.3/3 = 2.7/3 = 0.9

Lerner's Index is very high. So the firm has a ...

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The solution goes into a great amount of detail about the question being asked. The concepts are very well explained and easy to understand. The solution can be followed very easily by anyone who has some understanding of the concepts beforehand. Overall, an excellent response to the question.

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Explain why the prices and price-cost margins (i.e., Lerner indexes) are different in each market; in particular, explain how the price sensitivity in each market relates to the price level.

Explain why the prices and price-cost margins (i.e., Lerner indexes) are different in each market; in particular, explain how the price sensitivity in each market relates to the price level.

Please see attached files, and my working model, may be helpful.

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