Problem 4 (four parts, 50 points total)

Suppose that Alpha Beta Drug Company discovers a drug that cures itchy skin. Alpha Beta can manufacture the drug in the US or Canada for the same marginal cost of 10. Assume there are no fixed costs. In Canada, the demand for the drug is QC = 70-PC where QC is the quantity demanded in millions when the price in Canada is PC. In the US, the demand for the drug is QU = 110 - PU, where QU is the quantity demanded in millions of the drug when the price in the US is PU.

4.1. (20 points) If Alpha Beta can engage in third-degree price discrimination, what price should it set in each country to maximize profits? How much will they sell in each country and what

will profit be?

4.2. (10 points) Compute the elasticities of demand for US and Canada at the optimal prices and quantities you found in question 5.1. Do these elasticities match your understanding of the relationship between elasticity and price when a firm with market power is segmenting the market?

4.3. (10 points) Assume now that it is illegal for Alpha Beta to price discriminate, so that it has to charge only one price P in both countries. Suppose Alpha Beta charges a price of $50. What is quantity in each market? How much profit will it earn?

4.4. (10 points) Will the total surplus (consumer and producer surplus (profit)) across the two countries be higher with price discrimination or without price discrimination. Will the firm sell the drug in both countries? Explain your answer.