Global Pharmaceuticals (GP) just completed development of its latest pill for acid reflux.There are two countries in the worlda small wealthy country and a large poor one.GP estimates the demand for its pill in each of the two countries to be:

SMALL WEALTHY COUNTRYLARGE POOR COUNTRY

Q_S= 15 - P_SQ_L= 64 - 32P_L

where Q_Sand Q_Land the quantities demanded in the small wealthy (S) and large poor (L) countries and P_Sand P_Lare the prices of pills in those countries.GP estimates that the marginal cost of making a pill is $1 (regardless of location).International laws and other barriers prevent the transport of pills from customers in one country to customers in another.

Answer all the below numerical questions to two decimals.(Most will be .00)

1.What is GP's profit-maximizing quantity of pills to supply in thesmall wealthycountry?

__________

2. What is GP's profit-maximizing price of a pill in the small wealthy country?

__________

3. What is GP's total revenue from sales in the small wealthy country?

__________

4. What is GP's producer surplus* from sales in the small wealthy country?

__________

5. What is GP's profit-maximizing quantity of pills to supply in thelarge poorcountry?

__________

6. What is GP's profit-maximizing price of pills in the large poor country?

__________

7. What is GP's total revenue from sales in the large poor country?

__________

8. What is GP's producer surplus* from sales in the large poor country?

__________

9. What is GP's producer surplus* from total salesworldwide?

Now suppose that public opinion forces GP to sellall of its pills at the same priceregardless of location.

WithoutGP being allowed to price discriminate,

10. What is the profit-maximizing quantity of pills to supply in the world?

__________

11. What is the profit-maximizing price of pills in the world?

__________

12.How many pills will be sold in the small wealthy country?

__________

13.How many pills will be sold in the large poor country?

__________

14.Withoutprice discrimination, the small wealthy country gets _________ (more, fewer) pills

and the large poor country gets _________ (more, fewer) pills.

15.Price discrimination was helping the __________________ (small wealthy, large poor) country in the short run* (the time period during which we disregard the effect of price discrimination on the firm's ability to raise the funds necessary for long-term* investment).

Withoutprice discrimination,

16.What is GP's total revenue from sales in the world?

__________

17. What is the producer surplus from sales in the world?

__________

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Now, suppose that GP spent $25 on R&D spending to develop the acid reflux pill.

18. How much will GP have available for profit and new pill development if they can segment the two markets and sell pills at two different prices?

____________

19. How much will GP have available for profit and new pill development if they cannotsegment the two markets and must sell pills at the same price in both countries?

____________

20. In which scenario - segmented markets or one big market - is GP most likely to engage in R&D spending for drug development?

_____________________

21.Price discrimination helps__________________ (the small wealthy country, the large poor country,bothcountries) in thelong runby enabling pharmaceutical companies to have

__________ (more, less) R&D funds for drug development.

Finally, suppose that a shortage of pill ingredients temporarily limits GP's production of pills to just 16.4 total, worldwide.GP decides to sell the pills in whichever country (or countries) that nets them the most producer surplus. (GP is aware of possible public backlash but expects it to be small, since heartburn is not immediately life threatening.)In other words, GP will sell Q_Spills in the small wealthy country at one price and 16.4Q_Spills in the large poor country at another pricewhichever nets them the highest surplus.(If the fractional 0.4 pills gives you a problem, think about the pills in millions so that 16.4 is 16,400,000.)

22. What is GP's profit-maximizing strategy for selling the 16.4 pills? Answer to two decimals.

Sell _______ pills in the small wealthy country charging a price of ________ there and sell

_______ pills in the large poor country, charging a price of _________ there.

23. What is GP's producer surplus under this optimal pricing and sales strategy?

____________

24.What is marginal revenue in each country under the 16.4 pill constraint?

___________.

Try working 22 and 23 first yourself, thinking about how to set up the problem.If you need a hint, then highlight the text on the next page (after HINT) and turn the font color from whiteto black.

HINT:Questions 22, 23 and 24 require solving a simultaneous equations problem since you have the added constraint that Q_S+ Q_L= 16.40.If you don't want more of a hint, read no more. If you do, read on.MORE HINT:With the pill constraint of 16.4, it won't be possible for GP to get MR down to MC of 1.The best GP can do is to be sure that MR_L= MR_S(no country is delivering a higher marginal revenue than the other).So, substitute Q_S= 16.40 - Q_Linto the MR_Sequation and use it together with the MR_Lequation to solve for Q_L.With Q_Ldetermined, you can get all the rest of the values.

*NOTE: In this problem, there is a long run and a short run.At the beginning of the long run, Global Pharmaceuticals (GP) makes an investment in developing a new pill.With that fixed cost in place and the pill developed, GP then proceeds to maximize profit in the short run by setting MR = MC, knowing that in the long run, P must cover AC = C/Q or it is losing money on the pill and should think about going out of business if all pills have the same such profitability.GP's short-run producer surplus is used to cover its fixed cost (of pill development) and for profits, which can be distributed to shareholders or used for new drug development.Furthermore, since the marginal cost of making a pill is independent of location, GP's short run profit-maximizing strategy is the same as its long run one so long as it is making positive profit.