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Behavioural Economics

Read and follow the instruction document thoroughly. A basic plan is set out how the essay should be structured and this must be followed. Please contact me if any bits you are unsure of. This paper must be written by an Economics writer as there are economic terms and formulas to be handled carefully. This is a undergraduate essay for the final year of economics so it must reflect in the essay.

Statement of problem: When dealing with pharmaceutical companies a lot of risk and incalculable risk (ambiguity) is involved. Developing a drug can in a lack of better phrase be a shot in the dark but can also generate (if done correctly )extreme profits. Pharmaceutical companies try to minimise risk and struggle to minimise ambiguity but with a constraint as firms must make a profit.

Introduction (700 roughly words) – which must answer the following

•    Explain pharmaceutical companies (focus more on UK companies with inclusion of Abbvie).
http://en.wikipedia.org/wiki/Pharmaceutical_industry_in_the_United_Kingdom
•    How do they generate profits (extreme profit margins), revenue stream last year focus on the company “Abbvie”
•    Market share (concentrated market and competition). A patent would create a monopoly for a certain drug. Creating extreme profits while the drug is exclusive
Example: Pharmaceutical production was worth x million, It climbed to an estimated x million in 2000, indicating a rise in total market share for domestically produced medicines from 14 percent to 20 percent
•    Use business economics terminology – competitive behaviour (all competing to create a better drug for x), economies of scale, innovation, vertical effects etc
Example: Increased manufacturing capacity ……etc

Main body Talk about the following:

•    Most of the pharmaceutical production done concentrates on less sophisticated medicines such as simple antibiotics, cough and cold preparations, analgesics and antipyretics, sedatives there is not a lot of ambiguity here. These are not high risk. More technologically sophisticated pharmaceutical products cures for cancer etc, injectables, and more advanced antibiotics these deal with great ambiguity -creating drugs for something which doesn’t have a cure yet.

Incalculable risks
The utility of the investor is:

U(x1,…,xS ; p1,…, pS ; ß , ?) :=
? ??{u(x)} + (1-?) (1-ß) u(xworst) + (1-?) ß u(xbest)
where:
(p1,…, pS) denote the probability estimate
? ? [0,1]   denote the level of confidence
ß ? [0,1]   denote the level of optimism/pessimism

Ambiguity formula where Ambiguity under decision making shows degrees of optimism (hopes for the best) and pessimism (fears the worst).
-explain the formula
“If ?? is concave, the decision maker is ambiguity averse while he is ambiguity seeking of ?? is convex. However, for ambiguity neutral decision makers, a case for pharmaceutical companies, ?? is often linear” explain this using diagrams risk seeking risk neutral etc

An example company which deals with great ambiguity is Abbvie …………….this company focuses on.
(200 words relating to their ambiguity – they produce innovative products )
http://www.abbvie.com/about-us/who-we-are.html

•    Due to high ambiguity, innovation is rare and putting a patent on these drugs means companies can benefit handsomely.
Example: Medicines, like any other products, can be protected by intellectual property rights, such as patents. Such protection means that their production, importation and commercialization are subjected for a given period, to exclusive rights that allow title-holders to charge prices above marginal costs. These high prices for medicines deprive of access to others even though they are life essential.
Diagrams if possible
Talk about moral issues here – these medicines are essential it becomes how much do you value your life and willing to pay (only briefly)

Some factors that may come into play when creating drugs – briefly talk about these if possible.
Survivorship bias-that it’s more important the drug works even though side effects could be extreme
Micro life
Regression fallacy
Coincidence and luck
Overestimate bad things will happen to other people and underestimate they will happen to us

NOTE:
-No conclusion is needed
– Please follow these instructions and the order provided

Useful references

Anscombe, F. and R. Aumann., 1963. A Definition of Subjective Probability. The Annals of Mathematical Statistics, 34, p. 199-205.
Ellsberg, D., 1961. Risk, Ambiguity and the Savage Axioms. Quarterly Journal of Economics, 75 (4), p. 643-669.
Ghirardato, P., Maccheroni, F., Marinacci, M., 2004. Differentiating ambiguity and ambiguity attitude. Journal of Economic Theory 118, p. 133–173.
Klibanoff, P., Marinacci, M., Mukerji, S., 2005. A smooth model of decision making under ambiguity. Econometrica 73, p. 1849–1892.
Maccheroni, F., Marinacci, M., Rustichini, A., 2006. Ambiguity aversion, robustness, and the variational representation of preferences. Econometrica 74, p. 1447–1498.
Mehta, J., 2013. Behavioural Economics in Competition and Consumer Policy, ESRC Centre for Competition Policy. Norwich, United Kingdom: University of East Anglia.
Mukerji, S., 1997. Understanding the Non-Additive Probability Decision Model. Economic Theory, 9, p. 23-46.
Oxera Consulting., 2013. Behavioural Economics and its Impact on Competition Policy: A Practical  Assessment with Illustrative Examples from Financial Services. The Hague, Netherlands: The Netherlands Authority for Consumers and Markets (ACM).
Pauker, S., Kassirer, J., 1975. Therapeutic decision making: a cost-benefit analysis. New England Journal of Medicine 293, p. 229–234.
Wakker, P.P., 2010. Prospect Theory: For Risk and Ambiguity. Cambridge University Press, Cambridge, UK.

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