Acme Pharmaceutical Company discovers a vaccine that prevents the common cold and has a patent that grants it a monopoly on this drug. Acme has plants in both the North America 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 – Pë, where Që is the quantity demanded when the price in Europe is PE. In North America the demand for the drug is QN 110 – PÑ, where Qʼn is the quantity demanded when the price in North America is PN E N = (a) Determine the aggregate demand function for the combined ma ket. Determine the inverse demand function for the combined market and the inverse demand functions for each of the two mar- kets separately. (b) To begin, assume 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?
Acme Pharmaceutical Company discovers a vaccine that prevents the common cold and has a patent that grants it a monopoly on this drug. Acme has plants in both the North America 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 – Pë, where Që is the quantity demanded when the price in Europe is PE. In North America the demand for the drug is QN 110 – PÑ, where Qʼn is the quantity demanded when the price in North America is PN E N = (a) Determine the aggregate demand function for the combined ma ket. Determine the inverse demand function for the combined market and the inverse demand functions for each of the two mar- kets separately. (b) To begin, assume 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?
Principles of Microeconomics
7th Edition
ISBN:9781305156050
Author:N. Gregory Mankiw
Publisher:N. Gregory Mankiw
Chapter15: Monopoly
Section: Chapter Questions
Problem 7PA
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Transcribed Image Text:2. Acme Pharmaceutical Company discovers a vaccine that prevents the
common cold and has a patent that grants it a monopoly on this
drug. Acme has plants in both the North America 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 North America the demand for the drug is
QN = 110 - PN, where QN is the quantity demanded when the price
in North America is PN
(a) Determine the aggregate demand function for the combined mar-
ket. Determine the inverse demand function for the combined
market and the inverse demand functions for each of the two mar-
kets separately.
(b) To begin, assume 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?
Transcribed Image Text:(c) Now say the firm can engage in third-degree price discrimination.
What quantity and price should it set on each continent to maxi-
mize its profit? What profits will it earn?
(d) Calculate total surplus, which is consumer plus producer sur-
plus/profits, under each scenario b) and c). Will total surplus be
higher with price discrimination or without price discrimination?
Will the firm sell the drug on both continents in both scenarios?
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VIEWStep 2: a) Determine the aggregate demand function & inverse demand function
VIEWStep 3: b) Determine the price and profits if a single price is charged
VIEWStep 4: c) Determine the price, quantity & profits in case of third degree price discrimination
VIEWStep 5: d) Calculate total surplus in scenario (b) and (c)
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