Assume that a seed company supplies GM seed to farmers in the US and farmers in Argentina and faces the following demands: DUS: PUS=80-2QUS and DAR: PAR=50-QAR where DUS is the demand in the US and DAR is the demand in Argentina. Further assume that the firm’s marginal and average cost of production are MC=AC=$20/unit – the same in both countries –and that it can prevent resale of seed between the two countries. The company cannot observe the willingness to pay of every individual farmer in either country but it groups farmers according to the country in which they belong, i.e., farmers in Argentina form one group and farmers in the US form another group. Use the above information to answer the following questions.
a. Solve for and graphically show the market equilibrium in the US and Argentina assuming that the firm maximizes profits in these markets by employing 3rd degree price discrimination.
b. Compare the profits the firm realizes in these two markets.
c. What is the Lerner Index of monopoly power in each market? What is the price elasticity of demand and what does it show?