A U.S. pharmaceutical company holds a patent on a drug in the U.S. and an analogous patent in Canada. Its marketing department has identified the following inverse demand curves for this drug in the U.S. and Canada:
P us =1,000 - Qdus and P can =500 - Qdcan
The marginal revenues for each market is given by the following:
MRus =1,000 - 2Qus and MRcan =500 - 2Qcan
The firm's cost of producing this drug is given by the following function:
TC = 100Q
Suppose that the drug company can sell this drug at different prices in the U.S. and in Canada (third degree price discrimination). How do I determine what price the drug company will charge in the U.S. and what price it will charge in Canada in order to maximize profits?
Solution: MC = dTC/dQ = 100
Profit is maximized where MR = ...
Pricing is determined from the embedded scenario. A third degree price discrimination and maximizing profits are determined.