Question

(a) A pharmaceutical company sells its patented drug in two different countries. Trad- ing of pharmaceuticals across the two countries is not allowed. If the demand elasticity in both countries is the same, how would the pharmaceutical company go about deciding what price to charge in each country?

(b) Ifallconsumersofaproducthaveidenticaltastes,whatpricingstrategymaximizes the firm’s profits and requires the least amount of information about demand? Explain.

(c) Explain why a firm can earn more profit by price discrimination than from setting a uniform price.

Answer 1

a)

Here elasticities of demand are same in both country and according to given information, Marginal cost (MC) is also same for supplying good in two different market.

Hence, here Prices would be same across the market.

b)

Identical tastes means demand curves are same across the consumers. Hence, for profit maximizing, firm must equate MR with MC or

MR = MC

It will maximize profit of firm.

c)

Firm can maximize profit by setting different prices in two different market.

Market with low elasticity is charged higher price and market with higher elasticity is charged lower price. Hence, it will maximize profits of firms.

Same price across the market segment would not fetch right price for good.