The diagram below shows a pharmaceutical firm's demand curve and marginal cost and marginal revenue curves 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.Suppose this pharmaceutical firm is charging a single price for its drug and is maximizing its profits.If it then begins to perfectly price discriminate among its buyers it will

Question

The diagram below shows a pharmaceutical firm's demand curve and marginal cost and marginal revenue curves 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.Suppose this pharmaceutical firm is charging a single price for its drug and is maximizing its profits.If it then begins to perfectly price discriminate among its buyers it will

Quizplus · Accepted Answer

Perfect price discrimination allows the firm to charge each buyer their maximum willingness to pay, thus capturing all consumer surplus (areas D+E+C+F+H). The firm will still equate MR and MC because it wants to maximize profits. There will be a reduction in producer surplus due to areas C, F, and H, but this is outweighed by the increase in profits from capturing all consumer surplus. Total output may or may not decrease, depending on the specifics of the demand curve for each individual buyer. Overall, society as a whole may or may not experience a loss of economic surplus, depending on the extent to which the captured consumer surplus is offset by the reduced producer surplus.

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