A pharmaceutical firm faces the following monthly demands in the U.S. and Mexican Markets for one of its patented drugs:
Qus= 300,000 - 5,000Pus and Qx= 240,000- 8,000Px
Where quantities represent the number of prescriptions. Assume that the resale or arbitrage among markets is impossible and that marginal cost is constant at $2 per prescription in both markets. Monthly fixed costs are $1million in the US and 500,000 in Mexico.
a) Draw the demand, marginal revenue and marginal cost curves for each market. Estimate the profit maximizing prices and quantities graphically and/or determining the solutions algebraically. What are the firm’s total profits?
b) Determine the quantity in each market and maximum possible total profits if the firm engages in perfect (first degree) price discrimination. Is this behavior possible?