Suppose that a company is the only seller of a prescription drug (they have a patent). They produce the drug at a single plant in the U.S., but they sell it in the U.S. and Mexico. These can be considered separate markets because it is illegal to buy the drug in Mexico and then transport it into the U.S., or vice-versa.
a. Explain how the company decides how much of the drug to produce, how much to sell in the U.S. and how much in Mexico, and what price to charge in the U.S. and what price to charge in Mexico.
b. Now, due to some sort of health care reform, suppose that the demand for the drug increases in the U.S. What effect will this have on the total quantity of the drug produced,the quantities sold in the U.S. and Mexico, and the prices charged in the U.S. and Mexico.