The makers of Panax pain reliever do a lot of advertising and have very loyal customers. In contrast, the makers of generic paracetamol do no advertising, and their customers shop only for the lowest price. Assume that the marginal costs of Panax and generic paracetamol are the same and constant.Draw a diagram showing Panax’s demand, marginal revenue and marginal cost curves. Label Panax’s price and mark-up over marginal cost.Repeat part 1 for a producer of generic paracetamol. How do the diagrams differ? Which company has the bigger mark-up? Explain.What factors would affect the extent to which the makers of Panax could engage in predetory or destroyer pricing to force out competitors in this market?

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Economics: Private and Public Choice (MindTap Course List)

16th Edition

ISBN:9781305506725

Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Chapter24: Price-searcher Markets With High Entry Barriers

Section: Chapter Questions

Problem 13CQ

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The makers of Panax pain reliever do a lot of advertising and have very loyal customers. In contrast, the makers of generic paracetamol do no advertising, and their customers shop only for the lowest price. Assume that the marginal costs of Panax and generic paracetamol are the same and constant.

Draw a diagram showing Panax’s demand, marginal revenue and marginal cost curves. Label Panax’s price and mark-up over marginal cost.
Repeat part 1 for a producer of generic paracetamol. How do the diagrams differ? Which company has the bigger mark-up? Explain.
What factors would affect the extent to which the makers of Panax could engage in predetory or destroyer pricing to force out competitors in this market?

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