Suppose that Acme Pharmaceutical Company discovers a drug that cures the common cold. Acme has plants in both the United States and Europe and can manufacture the drug on either continent at a marginal cost of 10. Assume there are no fixed costs. In Europe, the demand for the drug is QE = 70 - PE, where QE is the quantity demanded when the price in Europe is PE. In the United States, the demand for the drug is QU = 110 - PU, where QU is the quantity demanded when the price in the United States is PU.
a) If the firm can engage in third-degree price discrimination, what price should it set on each continent to maximize its profit?
b) Assume now that it is illegal for the firm to price discriminate, so that it can charge only a single price P on both continents. What price will it charge, and what profits will it earn?
c) Will the total consumer and producer surplus in the world be higher with price discrimination or without price discrimination? Will the firm sell the drug on both continents?