The diagram below shows a pharmaceutical firm's demand curve and marginal cost curve for a new heart medication for which the firm holds a 20- year patent on its production. FIGURE 10- 5
-Refer to Figure 10- 5. Assume this pharmaceutical firm is practicing perfect price discrimination among its buyers. At its profit- maximizing level of output it will produce

Question

The diagram below shows a pharmaceutical firm's demand curve and marginal cost curve for a new heart medication for which the firm holds a 20- year patent on its production.  FIGURE 10- 5
-Refer to Figure 10- 5. Assume this pharmaceutical firm is practicing perfect price discrimination among its buyers. At its profit- maximizing level of output it will produce

Quizplus · Accepted Answer

In perfect price discrimination, the firm charges each buyer the maximum amount they are willing to pay. In this case, the firm is able to do so because it holds a patent and has no competition. Thus, the firm will charge each buyer a different price based on their willingness to pay, and produce up to the point where the marginal cost equals the maximum willingness to pay of the last buyer. 
In this diagram, the marginal cost curve intersects the demand curve at two points, Q0 and Q1. The firm will produce up to Q1, where the marginal cost equals the maximum willingness to pay of the last buyer at point A. Thus, the firm will produce Q1 units and charge a price of p1 on the last unit sold.

The Diagram Below Shows a Pharmaceutical Firm's Demand Curve and Marginal