Purchase Solution

# Price, Profit, and Consumer Surplus

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The firm's cost of producing this drug is given by the following function:
TC = 100Q

Suppose that the U.S. consumers can buy the same drug at Canadian prices over the Internet through Canadian pharmacies. (Assume that shipping costs are zero.) How do I determine the price and profit the drug company will set for its drug now? And, how do I figure out the total consumer surplus?

First, I should have two DIFFERENT price and quantity combinations. Then I need to find out which maximizes the firm's profit given that it cannot segment the market and must charge only ONE price to all of its customers.

Second, to determine the consumer surplus I will have to use a little geometry. I will have two triangles (one large, one small) and one rectangle from which I will find the area of each to determine consumer surplus. PLEASE SEE ATTACHMENT FOR ALL PERTINENT INFO.

##### Solution Summary

This job determines the price and profit the drug company will set. The firm's cost of producing a drug for a function is determined.

##### Solution Preview

TC = 100Q
Calculate MC
MC=dTC/dQ = 100

For first set of equilibrium, equate the first MR to MC
MR = 1000 - 2Q [for 0 < Q < 500]
Equating MR to MC we ...

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