Currently it is illegal to import prescription drugs into the United States desp

Question

Currently it is illegal to import prescription drugs into the United States despite the fact that U.S. consumers could buy drugs from Canada at lower prices than those available in the United States. What set of cost curves is most consistent with the price differential between the United States and Canada?

A.Producing a drug has a high and constant marginal cost.

B.Producing a drug has a low fixed cost and a rising marginal cost.

C.Producing a drug has a low fixed cost with a relatively high marginal cost.

D.Producing a drug has a high fixed cost with a relatively low marginal cost.

Explanation / Answer

If the production of a particular good results in lower price, the product cannot have a large fixed cost unless it has huge sales volume so that the large fixed cost gets a spread. Given the fact that the product is high in demand, fixed cost can be large.

Perhaps, the cost per unit production might also be lower given that drugs do not involve large number of labors and other variable factors. With lower fixed and marginal cost, the correct option is D.

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