Question Description

The drug Kallocain is sold by the pharmaceutical firm Kall in EU and demand is described by p=10-Q where p is price in euro and Q is quantity. Fixed costs are 0. Kall is a monopolist.

a)What is the profit maximizing price for Kallocain in the EU? Assume that and marginal cost equals 0. How high are profits? (4 p)

b)Assume that Kallocain also can be sold in Africa and that demand in Africa is given by p=4-Q. Kallocain is only given as injections in hospitals rather than in the form of pills as in EU and because of this there is a small, positive marginal cost in Africa. Despite these costs Kallocain claim that the policy of injections is profit maximizing. Might arguments related to price discrimination be a reason why pills are not sold in Africa? Briefly explain. (3 p)

c) (hard) Assume now that Kallocain only sets one price globally and that marginal costs are 0 in Africa as well. Draw the aggregate demand curve and indicate the profit maximizing quantity in a diagram in this case and calculate profit. Discuss the effects on profits and consumer surplus in the two regions in the case where markets can be segmented and, in the case, where they can't be segmented. No calculations needed for consumer surplus, a discussion of direction of results is sufficient.(8p)

c)Now again consider only the EU market. Assume that Kall can invest so that Kallocain becomes more efficient as a cure and demand increases to 20-Q. What is the highest cost that Kall would be willing to invest to gain this? Is the value to Kall higher or lower than what the invention would be worth to society if Kallocain could be sold at marginal cost? Motivate.

d)Consider a potential new entrant, Friberg Pharma. If it develops the same product as in d) it becomes the new monopolist and replaces Kall. What would this new invention be worth to Friberg Pharma?