Reference no: EM133251958
Suppose that a U.S. Pharmaceutical Company discovered a new drug that is very effective in curing a very severe disease. The firm can produce any quantity at a constant marginal cost of $20,000 and a fixed cost of $10 billion. All doses are produced in a single plant located in Baltimore. You were asked to advise the CEO of the company as to what prices and quantities it should set for sales in Europe and in the United States. The demand for that specific drugs in each market was estimated as:
QE = 4,000,000 - 100PE and QU = 1,000,000 - 20PU
where the subscript E denotes Europe and the subscript U denotes the United States. Q is the number of doses and P is the price per dose in dollars.
a. Assuming the firm can prevent resale, what quantity should the firm sell in each market, and what should the price be in each market? What would the total profit be?
b. If the U.S. Congress passed a law that forced the company to charge the same price in each market, what would be the quantity sold in each market, the equilibrium price, and the company's profit?
c. Elaborate on how the law requiring the company to charge the same price affected the the total surplus in the US.
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