Subject: Price theory
Details: Consider the elasticity of demand for drugs. How does it affect the terms of this trade-off (talking about short run and long run gains from patents)? Can you explain why, if the elasticity of demand is low, the short-run allocative distortion associated with patent protection?the ?welfare burden? may be relatively small?and the incentive to innovate relatively large (compared with a greater elasticity), but the distributional effects within the population will be correspondingly larger.
Answer is included in brainmass.doc file attached below
Drug consumption is generally assumed to be relatively inelastic, since most people will try to purchase the drugs they view as necessary, if they are able to afford them. Thus drug producers can be able to make the real profits in the long run since the demand is mostly influenced by needs rather then prices. A very high price elasticity of drugs suggests that when the price goes up, ...
The elasticity of demand for drugs is discussed in the solution.