Assume that the fi rm in Exercise 3 cannot prevent resale and is forced to set the same price in both markets. Find the price graphically and/or algebraically and show that total profi ts are less than those from part 3a.

Exercise 3

A pharmaceutical fi rm faces the following monthly demands in the U.S. and Mexican markets for one of its patented drugs:

where quantities represent the number of prescriptions. Assume that resale or arbitrage among markets is impossible and that marginal cost is constant at $2 per prescription in both markets. Monthly fi xed costs are $1 million in the United States and $500,000 in Mexico.

(a) Draw the demand, marginal revenue, and marginal cost curves for each market. Estimate the profi t-maximizing prices and quantities graphically and/or determine the solutions algebraically. What are the fi rm’s total profi ts?

Transcribed Image Text:

QUS = 300,000 5,000 Pus and Qx = 240,000 - 8,000 Px US