Problem 2. Pfizer is deciding how to price a new patented drug in two different markets. In the first market, consumers are relatively rich, and the demand for this drug is QR=50-p. In the second market, consumers are relatively poor, and the demand is QP=10-p. Suppose that the marginal cost of producing the drug is zero and the fixed cost is 100.

a) Suppose that Pfizer can charge different prices in each country (3rd Degree Price Discrimination). What price should it charge in each country? How many drugs would it sell in each?

b) What is the combined deadweight loss from monopoly power in both markets in the previous case?

Now suppose that Pfizer is not allowed to charge different prices in these two markets. Therefore, consumers in both rich and poor markets now become a single market.

c) Write down the total quantity demanded in this market for prices below 10 (as a function of the price p). Write down the total quantity demanded in this market for prices between 10 and 50 (as a function of p). Draw this total demand function graphically.

(Hint: Remember that people can't buy negative quantities. For which price, would the demand of each group fall below zero?)

d) Using the demand above when prices are less than 10, calculate the optimal price that Pfizer should charge. For this price, how much do consumers in each market buy?

e) Based on your previous answer, what price should Pfizer charge? What is the deadweight loss in this case?

f) In the case considered here, who benefits and who is hurt by allowing Pfizer to price discriminate?

g) Now suppose that, instead, the demand in the poor country is QP=30-p. Demand in the rich country remains the same as above. Calculate the new equilibrium prices with and without price discrimination.

h) In (g), who benefits and who is hurt but by allowing Pfizer to price discriminate?

i) Explain the difference between you answers in (f) and (h). Which case do you think is more common in practice? (This is an open-ended question, meant to make you summarize the conceptual conclusion from the algebraic exercise.)