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. Marginal cost is constant at $2 per prescription in both markets. Monthly fixed costs are $1 million in the United States and $500,000 in Mexico.
a. Assume that the firm cannot prevent resale or arbitrage and is forced to set the same price in both markets. Find the price and profits for the firm.
b. Assume that resale or arbitrage among markets is impossible. Find the profit-maximizing prices and quantities. What are the firm's total profits? Can the firm increase its profits by practicing price discrimination?