Question

Suppose that Perfect Labs produces autoclaves (laboratory equipment) at a constantmarginal cost equal to $20,000 and a fixed cost of $10 billion. Perfect Labs sells its autoclaves in Canada and in Germany. You are trying to determine the best pricing strategy for Perfect Labs and you know that the demands in each country are the following:

Qg = 4,000,000 - 100Pg and Qc = 1,000,000 - 20Pc

a) What is the quantity of autoclaves that Perfect Labs will sell in each market and at what price(s)? What is the total profit?

b) If Canada and Germany sign a trade agreement which forces Perfect Labs to charge the same price in both markets, how many units will be sold in each market and at
what price? What is the firm’s total profit in that case?

c) Now suppose that Perfect Labs considers charging a two-part tariff in each country. What is the profit-maximizing fixed fee and per unit price in each country? What is the total profit for Perfect Labs in this case?

d) If Perfect Labs were able to employ perfect price discrimination, what would be its total profit? Explain.

e) If Perfect Labs could choose, which of the three pricing strategies (a)-(c) would it choose? Why?

f) If consumers were allowed to vote for one of those three pricing strategies (a)-(c), which one would they vote for? Explain.

Answer 1