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Scenario 1 (length: as needed) Suppose the market for a certain pharmaceutical drug consists of domestic (United States) consumers and foreign consumers. The drug’s marginal cost is constant at $5 per dose. The demand schedules for both regions are given below. US Foreign Price Quantity Quantity $60 1,000 200 55 1,500 250 50 2,500 400 45 4,000 600 40 8,000 1,000 35 14,000 2,000 30 20,000 3,500 25 30,000 7,000 20 40,000 16,000 15 55,000 35,000 10 65,000 75,000 5 77,000 150,000 Assuming the markets cannot be separated (and thus the same price must be charged to both regions), what is the marginal revenue for the quantities that you can determine? What price should be charged to maximize profit? If the markets can be separated, determine the marginal revenues in each market. If the firm must set a single price for the drug in each market (the prices can vary between markets), what price should be charged in the foreign market? In the domestic market? What happens to the company’s profit? Scenario 2 (length: as needed) Assume that the drug company can negotiate with the US and foreign government(s) and thus tries to implement the two-tier pricing scheme that was described in Lecture 3, with one price for access to the drug, and a second price set per unit of the drug set at the marginal cost of the drug. You may assume that the increase in demand happens at exactly the listed prices. That is, 200 consumers in the foreign market would be willing to pay exactly $60, an additional 25 would be willing to pay $55, 150 more would be willing to pay $50, and so on. What prices would the pharmaceutical company set? What is the company’s profit? Does resale between markets need to be prevented? Scenario 3 (length: as needed) You are in charge of setting the optimal price for tickets for a local hockey team. The demand schedule for hockey tickets is below: Price Quantity $10 6,000 11 5,900 12 5,750 13 5,500 14 5,200 15 4,900 16 4,500 17 4,000 18 3,500 What price maximizes the revenue from tickets? (Note, since marginal costs are assumed to be zero, this also maximizes profits) Each spectator also spends money parking and on concessions. The team owns both the nearby lots and the concession stands at the arena. The team has estimated that concession profits increase by $5 per person, and for every four spectators, one parking permit that is priced at $10 is purchased. With these new sources of revenue, what is the optimal ticket price?

Scenario 1 (length: as needed)

Suppose the market for a certain pharmaceutical drug consists of domestic (United States) consumers and foreign consumers. The drug’s marginal cost is constant at $5 per dose. The demand schedules for both regions are given below.

        

US

Foreign

Price

Quantity

Quantity

  $60

   1,000

    200

   55

   1,500

    250

   50

   2,500

    400

   45

   4,000

    600

   40

   8,000

  1,000

   35

 14,000

  2,000

   30

 20,000

  3,500

   25

 30,000

  7,000

   20

 40,000

 16,000

   15

 55,000

 35,000

   10

 65,000

 75,000

    5

 77,000

150,000

 

  1. Assuming the markets cannot be separated (and thus the same price must be charged to both regions), what is the marginal revenue for the quantities that you can determine?  What price should be charged to maximize profit?
  2. If the markets can be separated, determine the marginal revenues in each market. If the firm must set a single price for the drug in each market (the prices can vary between markets), what price should be charged in the foreign market? In the domestic market?  What happens to the company’s profit?

Scenario 2 (length: as needed)

Assume that the drug company can negotiate with the US and foreign government(s) and thus tries to implement the two-tier pricing scheme that was described in Lecture 3, with one price for access to the drug, and a second price set per unit of the drug set at the marginal cost of the drug.  You may assume that the increase in demand happens at exactly the listed prices.  That is, 200 consumers in the foreign market would be willing to pay exactly $60, an additional 25 would be willing to pay $55, 150 more would be willing to pay $50, and so on.

  1. What prices would the pharmaceutical company set?
  2. What is the company’s profit?
  3. Does resale between markets need to be prevented?

 

Scenario 3 (length: as needed)

You are in charge of setting the optimal price for tickets for a local hockey team.  The demand schedule for hockey tickets is below:

Price

Quantity

  $10

   6,000

   11

   5,900

   12

   5,750

   13

   5,500

   14

   5,200

   15

 4,900

   16

 4,500

   17

 4,000

   18

 3,500

 

  1. What price maximizes the revenue from tickets? (Note, since marginal costs are assumed to be zero, this also maximizes profits)
  2. Each spectator also spends money parking and on concessions. The team owns both the nearby lots and the concession stands at the arena. The team has estimated that concession profits increase by $5 per person, and for every four spectators, one parking permit that is priced at $10 is purchased. With these new sources of revenue, what is the optimal ticket price?

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