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September 21, 2014

Homework Help: Managerial Economics/Math

Posted by klynn on Tuesday, September 25, 2007 at 10:58am.

This is an MBA-level Managerial Economics course. I am working on a homework assignment and have a couple problems that I don't really know how to get started. Here is another:

Assume that a drug manufacturer sells a major drug in Europe and the U.S. Because of legal restrictions, the drug cannot be bought in one country and sold in another. The demand curve for the drug in Europe is:

Pe = 10 - Qe

where Pe is the price (in dollars per pound) in Europe and Qe is the amount (in millions of pounds) sold there. The demand curve for the drug in the U.S. is:

Pu = 20 - 1.5Qu

where Pu is the price (in dollars per pound) in the United Statees and Qu is the amount (millions of pounds) sold there. Marginal costs are a constant $2 for all quantities sold. Assume that fixed costs are zero.

a. Calculate the optimum price, quantity, and profit for the firm if price discrimination is not possible and Pe = Pu.

b. Now assume that the firm can price discriminate in the two markets and charge separate prices in teh two markets. Compare optimum prices, quantities, and resulting profits. Compare the total profits for both cases. Provide an explanation for the different pricing strategies when price discrimination is possible.

If someone could at least tell me where to get started (i.e. how to approach the problem, etc.) I would greatly appreciate it. Thanks!

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