A pharmaceutical company discovers a drug that cures the common cold. The company attains plants in both the United States and Europe, and can make the drug on either continent at a marginal cost of 10. Assume there are no fixed costs. In Europe, the demand for the drug is:

Q_E = 70 - P_E

where Q_E is the quantity demanded when the price in Europe is P_E. In the United States, the demand for the drug is:

Q_U = 110 - P_U

where Q_U is the quantity demanded when the price in the United States is P_U.

a) If the firm can exchange in third-degree price discrimination, what price should it set on each continent to maximize its profit?

b) Using the values found in part (a), show that:

c) If the firm was able to perfectly (first-degree) price discriminate, how much would the company produce in each continent?

PEPU=[(1+1/ED)1]MC[(1+1/UD)1]MC