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ECO IGCSE UNIT 1 Answers
ECO IGCSE UNIT 1 Answers
Example answer
Example answer
Market power refers to the ability of a firm to set price or output in the
market. Market power is largely determined by market share. The more a
firm dominates the market, the more market power they can exert.
(ii) Explain two possible economic reasons why Mylan was able to raise the
price of EpiPens to over 400% from 2009 to 2016. [4 marks]
Example answer
First, Mylan may be able to raise the price of EpiPens significantly because
EpiPens are essential goods for those individuals with allergies, and are hence
price inelastic. Even a significant increase in price of over 400% will bring
about a smaller than proportionate fall in quantity demanded. Mylan can
successfully increase price, without a corresponding fall in total revenue.
Second, Mylan may be able to raise prices if it is the only or the dominant
firm in the market. If Mylan raises its prices, and there are no close
substitutes for EpiPens, then consumers will have no choice but to continue
to buy the good, regardless of the increase in price.
Exam tip
Read the question stem carefully. The information in the question states that Mylan does not hold a patent, a
not be accepted.
(iii) Calculate the profit per EpiPen for Mylan for each year in the US. [2
marks]
Example answer
Profit = AR – AC
2009 $124 $10
Profit = (($124/2) – ($10))
Profit = $62 - $10
Profit = $52
Be aware
Always show your working. If there is not enough space in the answer box, always ask for extra paper.
(iv) Explain two economic reasons that may account for different prices for
EpiPens in different markets. [4 marks]
Example answer
Second, the market for epinephrine delivery devices in the EU might be more
competitive. If there are multiple pharmaceutical companies selling EpiPen
products in the EU, the increased competition in the market will bid down
prices.
(v) Complete the table below. Calculate the price for each year. [2 marks]
Example answer
Example answer
e= % change in Qd
% change in price
% change in Qd
= 12700−88211270012700−882112700 = 387912700387912700
divided by
% change in price
= 52.52−1122.3252.5252.52−1122.3252.52= −1069.852.52−1069.852.52
e =.30543307 ÷ - 20.3693831
e = 0.01499471
e = 0.01
Be aware
A common mistake is to reverse the numerator and denominator for the equation to calculate elasticity.
Exam tip
Be careful not to round down your answer until the very end.
(vii) Assuming patients receive 60 tablets per prescription, calculate how .
much would a prescription for Daraprim increase in price from 2014 to 2015.
[1 mark]
Example answer
(viii) Let us assume the government wishes to combat higher drug prices for
drug X through regulation. The government aims to regulate drug prices at
the social optimum. Calculate the change in price and output decisions as a
consequence of regulation of drug prices. [2 marks]
Example answer
Before regulation, the pharmaceutical company will set price and output
decisions at the profit maximising condition where MR = MC.
Hence the drug company will set output at 30, and price at $700.
Hence the regulated drug company will set output at 45 and price at $550.
As a result of regulation, output will rise by 15 units and price will fall by
$150.
Example answer
According to the data, in 2009 Mylan held an 85% market share for medical
devices that dispensed epinephrine. Clearly, Mylan dominated the market,
and can therefore be considered a monopoly. Further, there are few
alternatives for individuals when suffering from anaphylactic shock, so the
EpiPen faces few substitutes – and is hence inelastic.
Lastly, the data regarding the price of EpiPens in different markets was very
telling. The price for EpiPens in the US was three times higher (over $600)
than the next most expensive country – Germany (less than $200). The same
product, the same producer, and yet a significantly lower price. This may be
because of two reasons. First, pharmaceutical companies are highly regulated
in Europe. It is recognised that there are positive externalities that arise from
medicine and as such everyone should have access to it at lower costs. The
government may intervene in the market to set the price of prescriptions. In
this way, price gouging is avoided. Second, there may be more competition
in Europe for EpiPen type products. The EU encourages competition, and
there are eight companies in Europe selling/competing in the EpiPen market.
This competition drives down prices.
Although it can be argued that government regulation stops firms using the
price mechanism and the profit motive to guide price and output decisions –
in the case of pharmaceutical firms – this may be a good thing! Left to the
market, Mylan has abused their monopoly power by driving up prices so the
product is simply unaffordable for many families. The argument that
supernormal profits are needed to recoup research and development seems to
be very hollow. On balance, in the case of life saving medicine, it seems
government regulation is the best option.