In 1996, the drug Prilosec became the best-selling anti-ulcer drug in the world. Given the fact that the drug was the most effective among all other competing drugs, managers at Prilosec initially set price at a 400 percent markup over cost in order to boost profits. Prilosec’s marginal cost (production and packaging) was only about $0.60 per daily dose.
A. What price did the managers set in order to maintain the 400 percent markup on cost? Show your calculations.
B. If price elasticity of Prilosec drug was around -1.5, did the markup of 400 percent follow the profit maximizing rule? Explain with calculations.