1) Suppose that you are hired as a consultant to a firm producing a therapeutic

Question

1) Suppose that you are hired as a consultant to a firm producing a therapeutic drug protected by a patent that gives a firm a monopoly in two markets. The drug can be transported between the two markets at no cost. The demand schedule in the first market is Q1=100-0.5P1, where P1 is the price of the product and Q1 is the amount sold in the market. In the seconds market, the demand is Q2=140- P2, where P2 is the price of the product and Q2 is the amount sold in the market. The firm’s overall marginal cost is MC=20+ Q1+ Q2. What price(s) should the firm charge in these markets?

Explanation / Answer

As there is no transport cost goods can move between markets which rules out price discrimination. So we have to charge same price in both markets.

Both the market can be combined.

Let P1= P2= P then Qt = 100-.5P +140-P = 240 -1.5P

P= ( 240-Qt)/1.5

MR= (240-2Qt)/1.5

MC= 20+Qt

Equate MR to MC

(240-2Qt)/1.5 = 20+Qt

Qt = 60

P= (240-60)/1.5 = 120

TR= 120*60 =7200

TC= 60*(20+60) = 4800

Profits = 7200-4800 =2400

so the price equal to 120 should be charged.

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