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# A certain pharmaceutical firm recently developed a new

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Manager
Joined: 22 Apr 2013
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Re: A certain pharmaceutical firm recently developed a new  [#permalink]

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16 Oct 2013, 19:46
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1. 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. --- CORRECT, because it tells us that D will soon be patented and patented products sell 10 times their variable costs. That will surely be enough to be a major part in firms profits.

2, The development of some pharmaceutical products involves substantial initial expenditures on research, testing, and approval.--- Out of scope. Does not talk about variable costs or revenue...

3. In clinical tests, Dendadrine has proven far more effective at treating severe stomach disorders than any prior available treatments, without any serious side effects. --- Out of Scope. No information about variable costs and the pricing etc. Just tells us that D is going to sell well but we don't know how much money it will make.

4. No competitors are developing or planning to develop new medicines that might compete with Dendadrine in the marketplace. --- Out of Scope. Again even though D will sell well. We have no information on the price and variable costs of D.

5. Millions of people suffer from severe stomach disorders, representing an estimated one to two billion dollars every year in revenue. --- Okay. D will probably make up the 5 billion in a few years. But do we know what are the variable costs of D. For example, what if storing D costs another \$5 billion a year and on top of that transporting D in a high security, cool temperature trucks cost another \$5 billion a year. Now do we know for sure that even though it is expected to earn 1-2 billion, it will make up for all the variable costs...

Check out this link with the same question and more explanations...
a-certain-pharmaceutical-firm-recently-developed-a-new-105428.html

Hope that helps.
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Joined: 24 Jul 2013
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Re: A certain pharmaceutical firm recently developed a new  [#permalink]

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10 Aug 2015, 10:47
VeritasPrepBrian wrote:
Great discussion, everyone. One piece of advice on these questions - make sure that you're "conclusion driven" on Strengthen/Weaken questions, which means that on these derivative "Explain the Paradox/Discrepancy" questions you want to make sure that you're focusing first on the paradox.

1) In order to just break even on this expensive drug, they'll need to sell for 5x the variable cost
2) HOWEVER, the firm believes that this particular drug will become its biggest profit generator

Just looking at that paradox, it should stand out that we're looking for a reason to believe that they'll be able to sell for greater than the breakeven point, which is 5x the variable cost. Answer choice A gives us that reason - with patent protection they'll be able to sell for 10x the variable cost, so therefore we're doubling the breakeven revenue and making 100% profit.

If you focus on the paradox, you'll often be able to anticipate the correct answer to a decent degree, and even if not you'll know which two items you must link together. On these "explain the paradox" questions, make sure that you settle on a paradox before you start dissecting answer choices.

THIS! Encompasses the entire Paradox theory!
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A certain pharmaceutical firm recently developed a new  [#permalink]

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12 Sep 2016, 00:53
It's clear A , after I understood the meaning of "break even" and "variable cost"

break even-reach a point in a business venture when the profits are equal to the costs. a point where a firm is neither at loss nor at profit
variable cost- a cost that varies with the level of output.
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Re: A certain pharmaceutical firm recently developed a new  [#permalink]

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24 Sep 2016, 22:52
What I'm not clear about is that break even depends not only on the selling price but also on the quantity sold (in addition to fixed and variable costs). None of the choices takes care of both. (A) speaks only about the selling price. Others speak only about quantities sold, market size and so on. How do we arrive at the right answer?
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Re: A certain pharmaceutical firm recently developed a new  [#permalink]

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25 Sep 2016, 11:57
elcosanostrax wrote:
What I'm not clear about is that break even depends not only on the selling price but also on the quantity sold (in addition to fixed and variable costs). None of the choices takes care of both. (A) speaks only about the selling price. Others speak only about quantities sold, market size and so on. How do we arrive at the right answer?

size is already taken care of in premise . Read this-"Given the size of the market for Dendadrineand 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."

so you have to find answer that says they can sell at price more than 5 times.
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Re: A certain pharmaceutical firm recently developed a new  [#permalink]

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16 Nov 2016, 13:16
A - correct
C-doesn't mean more people will buy it. There is brand loyalty to consider
D- is there strong enough demand?
E-competitors could drive firm out
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Re: A certain pharmaceutical firm recently developed a new  [#permalink]

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15 Jul 2017, 23:16
1
Hi,
My doubt regarding Option A.
Although Size of the market is mentioned , it is not clear if drug will be accepted by people when Price is 10x.
From the answer options it is evident that other company drugs are also present.
People may prefer to buy cheaper drugs.

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Re: A certain pharmaceutical firm recently developed a new  [#permalink]

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16 Jul 2017, 04:24
Imo A
It gives us a reason why the firm believe that the new drug is going to be its major profit producer.
B and E irrelevant .
C just repeats the information in the argument .
D this does not affect out argument in nay sense.
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Re: A certain pharmaceutical firm recently developed a new  [#permalink]

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16 Jul 2017, 11:54
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?

Type - Explain the situation /Paradox
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. - Correct

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

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. - Irrelevant -the argument already talks about this

D. No competitors are developing or planning to develop new medicines that might compete with Dendadrine in the marketplace. - iSWAT - but this does not explain that product will be profitable

E. Millions of people suffer from severe stomach disorders, representing an estimated one to two billion dollars every year in revenue. - irrelevant - it is not related to this particular case and describes the situation for the industry as a whole

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Re: A certain pharmaceutical firm recently developed a new  [#permalink]

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20 Dec 2017, 23:49
Both A and D could be a answer here.

But sentence in the passage
- company would need to sell Dendadrine at a price that is at least 5 times greater than variable costs just to break even -

tells us A is more appropriate answer here.
Re: A certain pharmaceutical firm recently developed a new &nbs [#permalink] 20 Dec 2017, 23:49

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