Suppose that ACE Pharmaceutical Company develop a patent C- pap for Sleep disord
ID: 1108395 • Letter: S
Question
Suppose that ACE Pharmaceutical Company develop a patent C- pap for Sleep disorder. ACE has plants in two continents for C-pap, Europe and US, with marginal cost of 10 to produce the C-pap. Market demand for the C-pap in Europe in is QE = 30 – PE where market demand for the C-pap in US is QU = 110 – PU. a. Will third-degree price discrimination increase the firm’s profits? b. Suppose the demand for the C-pap in Europe becomes QE = 55 – 0.5PE. Will third-degree price discrimination increase the firm’s profits?
Explanation / Answer
Marginal cost is same in both markets at $10. Market demands are QE = 30 – PE and QU = 110 – PU. Hence marginal revenues are MRE = 30 - 2QE and MRU = 110 - 2QU
Find the price and quantity in each market
MRE = MC and MRU = MC
30 - 2QE = 10 and 110 - 2QU = 10
QE* = 10 and QU = 50
PE* = 30 - 10 = $20. and PU* = 60
Profits in Europe = (20 - 10)*10 = $100 and in US = (60 - 10)*50 = $2500. Total profits are $2600
Had it been charging a single price, single demand would have been Q = 30 - P + 110 - P or Q = 140 - 2P
MR = 70 - Q
MC = 10
70 -Q = 10
Q* = 60 and P* = $40. Profit = (40 - 10)*60 =$1800
Hence this implies third degree price discrimination pays off because profits are increased
b) Market demands are QE = 55 – 0.5PE and QU = 110 – PU. Hence marginal revenues are MRE = 110 - 4QE and MRU = 110 - 2QU
Find the price and quantity Europe
110 - 4QE= 10
QE* = 25
PE* = 110 - 2*25 = $60.
Profits in Europe = (60 - 10)*25 = $1250 and in US = (60 - 10)*50 = $2500. Total profits are $3750
Had it been charging a single price, single demand would have been Q = 55 - 0.5P + 110 - P or Q = 165 - 1.5P
MR = 110 - (4/3)Q
MC = 10
110 - (4/3)Q = 10
Q* = 82.50 and P* = 165 - (2/3)*82.50. = 110 Profit = (110 - 10)*82.5 =$8250
Hence this implies third degree price discrimination is not suitable now because profits are decreased with this practice.