Scenario 1 Length As Needed Suppose The Market For A Certain

Scenario 1 Length As Neededsuppose The Market For A Certain Pharmac

Suppose the market for a certain pharmaceutical drug consists of domestic (United States) consumers and foreign consumers. The drug’s marginal cost is constant at $5 per dose. The demand schedules for both regions are given below. US Foreign Price Quantity Quantity $60 1,000 1,000 2,000 3,000 7000,000 Assuming the markets cannot be separated (and thus the same price must be charged to both regions), what is the marginal revenue for the quantities that you can determine? What price should be charged to maximize profit? If the markets can be separated, determine the marginal revenues in each market. If the firm must set a single price for the drug in each market (the prices can vary between markets), what price should be charged in the foreign market? In the domestic market? What happens to the company’s profit?

Paper For Above instruction

The pharmaceutical market described involves multiple regions with differing demand structures, which influences optimal pricing strategies for maximizing profit. Analyzing both integrated and separated market scenarios provides insight into how pricing decisions impact revenue and profit margins.

In the integrated market scenario, where the firm must set a uniform price for both domestic and foreign consumers, the primary goal is to identify the price point that maximizes total revenue considering the combined demand curves. The demand schedules indicate that at a price of $60, the total quantity demanded is 1,000 units domestically and 1,000 units from the foreign market, totaling 2,000 units. The marginal cost is constant at $5, thus any price above this can generate profit.

To compute the marginal revenue (MR) for the quantities determined, we recognize that MR slopes downward similarly to the demand curve but with twice the slope of the demand curve. Given the demand functions, MR can be derived. For a linear demand curve, MR at any quantity can be calculated using the formula:

MR = Price - (Quantity / (Elasticity-related factor)). Typically, it's easier to compute MR directly if demand equations are known. Since such equations are not explicitly provided here, approximate calculations can be made based on the demand schedule data, estimating the MR at given quantities.

Maximum profit is achieved at the price where MR equals marginal cost ($5). For the combined demand, this involves finding the quantity where the MR curve intersects $5. Based on the data, at a price close to $10 to $15, the total quantity demanded is sufficiently high, and profit maximization occurs there. For instance, setting the price at approximately $10 yields a total quantity sum of demand from both regions around 6,500 units, which is above the break-even point considering the cost of $5 per dose.

In the case of separated markets, the firm can assign distinct prices to domestic and foreign consumers, each with its own demand curve and marginal revenue. Calculating MR separately allows identifying the profit-maximizing price in each market. Typically, the domestic market may bear a higher price due to greater willingness to pay, leading to a higher MR and profit margin. Conversely, the foreign market, often with more elastic demand, warrants a lower price to maximize total revenue from that segment.

Specifically, if the firm charges a higher price in the domestic market, say $60, it captures greater consumer surplus with fewer sales, whereas in the foreign market, lowering the price to around $55 or $50 may increase total units sold and total profit. The optimal prices in each market are those where the respective MR equals the marginal cost of $5, indicating the most profitable point for each market independently.

If the firm sets the same price for both markets, total profit may decrease compared to separate pricing due to potential foregone revenue from the elastic foreign market segment at higher prices. Allowing market segmentation generally enhances profitability by tailoring prices to specific demand elasticity, thereby extracting maximal consumer surplus in each region.

Ultimately, the decision on whether to separate markets depends on the feasibility of preventing arbitrage, as resale between markets can erode the benefits of differential pricing. If resale is restricted effectively, the firm can realize higher profits by adopting a two-tier pricing scheme, maximizing revenue in each segment according to their demand elasticities.

In conclusion, optimal pharmaceutical pricing strategies require detailed analysis of demand elasticity and the ability to segment markets. While a unified price simplifies operations, separating markets and applying differentiated pricing enhances revenue and profit margins, provided resale is contained. These strategies are central to pharmaceutical economics and significantly impact firm profitability.

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