A certain pharmaceutical firm recently developed a new medicine, Dendadrine, that provides highly effective treatment of severe stomach disorders that were previously thought to be untreatable. However, to develop the new medicine, the company spent nearly $5 billion in research and development costs. Given the size of the market for Dendadrine and the amount of the initial investment in its development, the company would need to sell Dendadrine at a price that is at least 5 times greater than its variable costs just to break even. Yet the company’s management claims that Dendadrine will soon become the major driver of the firm’s profits.

Which of the following statements best reconciles the management’s claim with the evidence on the expenditures associated with the development of Dendadrine?

A. The pharmaceutical firm expects to be granted patent protection for Dendadrine; drugs under patent protection typically sell at prices that are approximately ten times their variable costs.

B. The development of some pharmaceutical products involves substantial initial expenditures on research, testing, and approval.

C. In clinical tests, Dendadrine has proven far more effective at treating severe stomach disorders than any prior available treatments, without any serious side effects.

D. No competitors are developing or planning to develop new medicines that might compete with Dendadrine in the marketplace.

E. Millions of people suffer from severe stomach disorders, representing an estimated one to two billion dollars every year in revenue.


OA A

Source: Manhattan Prep