Answer:
a) This policy would be advantageous if the demand for sterile needles has elastic characteristics and the cross-price elasticity of demand linking drugs and sterile needles is high and
positive.
b) This policy would be unfavorable if the demand for sterile needles is characterized as inelastic while the cross-price elasticity between drugs and needles is high and
negative.
Explanation:
a) Under what conditions is this policy viewed as beneficial?
This policy is advantageous when the demand for sterile needles is elastic and the corresponding cross-price elasticity with drugs shows a positive and high relationship.
The elastic demand for sterile needles indicates that the quantity demanded increases more significantly in response to price changes.
The positive cross-price elasticity suggests that as the price of needles decreases, the demand for drugs decreases, assuming they are substitutes. Therefore, as the price of sterile needles approaches zero, the
demand for drugs diminishes.
b) Under what conditions is this policy seen negatively?
This policy turns unfavorable when the demand for sterile needles is inelastic and the cross-price elasticity relating drugs to needles is high and
negative.
An inelastic demand for sterile needles suggests the quantity demanded does not increase much with price reductions.
A
negative cross-price elasticity indicates that the two products, drugs and sterile needles, are
complements. Thus, as the price of sterile needles drops to zero, the
demand for drugs rises.
