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    Consumer Surplus

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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

    How do I determine the profits that the drug company makes in the U.S. market, and the profit it makes in the Canadian market? Also, how do I determine the consumer surplus in both the U.S. market and the Canadian market?

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    Solution Preview

    For the US: MRus = 100
    Or, 1000 - 2Qus = 100
    Or Qus = (1000 - 100)/2 = 450
    So, Pus = 1000 - 450 = $550
    Profit = PusQus = $550*450 = ...

    Solution Summary

    Find the consumer surplus in both the U.S. market and the Canadian market.