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    Third Degree Price Discrimination & Maximizing Profits

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    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?

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    Solution Preview

    Solution: MC = dTC/dQ = 100
    Profit is maximized where MR = ...

    Solution Summary

    Pricing is determined from the embedded scenario. A third degree price discrimination and maximizing profits are determined.