Scenario 1 (length: as needed) Suppose the market for a certain pharmaceutical d

Question

Scenario 1 (length: as needed) Suppose the market for a certain pharmaceutical drug consists of domestic (United States) consumers and foreign consumers. The drug's marginal cost is constant at $5 per dose. The demand schedules for both regions are given below Foreign Price Quantity Quantity 25 400 4,000 600 1,000 14,000 20,000 30,000 40,000 3,500 7,000 16,000 65,000 75,000 77,000 150,000 1. Assuming the markets cannot be separated (and thus the same price must be charged to both regions), what is the marginal revenue for the quantities that you can determine? What price should be charged to maximize profit? 2. If the markets can be separated, determine the marginal revenues in each market. If the firm must set a single price for the drug in each market (the prices can vary between markets), what price should be charged in the foreign market? In the domestic market? What happens to the company's profit?

Explanation / Answer

1. When the markets cannot be separated then the two market will be considered as one and the summation of the market will be formed.

The following table calculates the aggregate demand as Q of US + Q of foreign. Then total revenue (TR) is calculated by multiplying total Q with price and then marginal revenue (MR) is calculated by dividing change in Tr with change in Q. For example MR at third level is (TR at 3 level - TR at 2 level) / (Q at 3 level- Q at 2nd level)

A firm maximizes profit when its MR equals MC. The firms MC is $5. And MR is $6 at price 15 and it gets $1 (less than MC) at $10 price. Hence profitability is that charge when MR equals MC or when MR is quite higher than MC if it is not equal to MC as charging at level where MR lowers than MC will create loss.

Hence the profit maximizing price is $$15.

2.

Now when markets are separated then followings are the values.

Notice that in US market MR is $5 when price $20 which is equal to MC. Charging more than that will cause loss. hence it is profit maximizing price. $20 will be charged in US market.

In foreign market MR is not $5 at any given price but it is closeest to $5 but more than that when price is price is $10. Hence $10 will be charged in Foreign market.

The company;s profit will increase as now when different prices are charged then MR is more closest to MC in both market than the time when single price was charged.

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Price US Q Foreign Q Total Q (US Q+Foreign Q) TR = Total Q *price MR = change in TR / change in TotalQ 60 1000 200 1200 72000 0 55 1500 250 1750 96250 44.09090909 50 2500 400 2900 145000 42.39130435 45 4000 600 4600 207000 36.47058824 40 8000 1000 9000 360000 34.77272727 35 14000 2000 16000 560000 28.57142857 30 20000 3500 23500 705000 19.33333333 25 30000 7000 37000 925000 16.2962963 20 40000 16000 56000 1120000 10.26315789 15 55000 35000 90000 1350000 6.764705882 10 65000 75000 140000 1400000 1 5 77000 150000 227000 1135000 -3.045977011

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