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 has no fixed costs and is practicing perfect price discrimination among its buyers. At its profit-maximizing level of output, it will generate a total profit represented by

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 has no fixed costs and is practicing perfect price discrimination among its buyers. At its profit-maximizing level of output, it will generate a total profit represented by

Quizplus · Accepted Answer

In perfect price discrimination, the firm charges each customer their maximum willingness to pay, which equals the demand curve. Therefore, the firm will produce up to the point where marginal cost equals the highest willingness to pay, which is at Q₁. The profit-maximizing level of output is represented by the area below the demand curve minus the area below the marginal cost curve, up to Q₁. This is because the firm charges each customer their maximum willingness to pay, but only incurs the marginal cost of producing the last unit sold. Therefore, the total profit generated is represented by the shaded area (C+F+H) in the figure.

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