extra_costs_ques - UNIVERSITY OF CALIFORNIA HAAS SCHOOL OF...

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UNIVERSITY OF CALIFORNIA HAAS SCHOOL OF BUSINESS EWMBA 201A—Economic Analysis for Business Decisions Fall 2007 Professor Catherine Wolfram Extra Problems on Economic Costs & Costs of Production Question 1 Advagen is a pharmaceutical company with a new topical skin cream product. Advagen’s hope for this product, currently called compound Alpha, was that it would be the first prescription strength pharmaceutical product to treat skin wrinkles and that it would appeal to a huge anti-aging market as a “cosme-ceutical.” In line with this, Advagen has spent $4 million so far on clinical trials and the FDA approval of compound Alpha. Alas, the FDA has rejected Advagen’s claim that compound Alpha can be used for treating wrinkles, and has only approved it for a more limited set of skin conditions, such as eczema. Advagen had planned a $6 million advertising campaign for the rollout of compound Alpha, made up of $2 million targeted towards doctors and $4 million for broad consumer advertising. The consumer advertising will not be useful if
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