A pharmaceutical firm receives approval for marketing a drug in country A and country B. The demand function for this drug in countries A and B are p=84-2xand p=124-3xrespectively, where pis the price of a prescription drug and xis the quantity of the prescription drug demanded by patients. Assume that pharmaceutical markets in country A and country B are spatially separated and that parallel trade (i.e., consumers in country A purchasing drugs from country B, where the price of the drug is lower) is completely prohibited by the government. For simplicity, assume that there are no transportation costs and that the marginal cost of producing an additional pill of the drug is $4 in country A and $8 in country B.

a) Determine the optimal price and quantity for this pharmaceutical product in country A and in country B if the firm seeks to maximise profits. (7 marks)

b) Calculate the price elasticity of demand for drugs in country A and country B under such optimal pricing. (7 marks)

c) Compare the relationship between the optimal price and the price elasticity between the two countries. (6 marks)

Answer rating: 100% (QA)

a To determine the optimal price and quantity for the pharmaceutical product in country A and country B we need to maximize the firms profits Profit maximization occurs when marginal revenue MR equals ... View the full answer