Question

BioChem has a patent on a chemical product that is used as a key input in...

BioChem has a patent on a chemical product that is used as a key input in producing farm and home agricultural fertilizer. Currently, BioChem produces the product and sells it to companies who manufacture the final products for the farm and home users. BioChem faces the following demand curves from the farm and home market segments:

Farm: P = 501 - 10Q

Home: P = 101 - 5Q

BioChem faces a marginal cost of production of $1. Assuming there is a potential arbitrage opportunity on resale of the chemical product, what would be the best way for BioChem to price discriminate?

a. BioChem should forward integrate into the farm market segment.

b. BioChem should only sell to companies in the farm market.

c. BioChem should only sell to companies in the home market.

d. BioChem should forward integrate into the home market segment.

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Homework Answers

Answer #1

Correct answer is (d)

To maximize total profits, Biochem would like to set marginal revenue equal to marginal cost in each market.

If biochem sells the product for $251 in farm market and for $ 51 in home market, then potential arbitrage.

Companies can buy at $51 from home market and resell the product at a price less than 251 to earn profit

Biochem should integrate in the home market segment and charge $ 51 up to 10 units and $251 for more than 10 units

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