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. 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 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. 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 occurs when a firm charges each customer the maximum price they are willing to pay for a product. In this case, the firm will be able to capture all of the consumer surplus (areas D, E, C, F, and H) as profit. This will increase the firm's total revenue and profits, although it will result in a loss of consumer surplus. The firm will still be equating MR and MC, as it will adjust the price it charges each customer based on their willingness to pay. It is possible that the total output will either increase or decrease, depending on the specific pricing strategy employed by the firm. There will not be a loss of economic surplus to society as a whole, as the firm will be able to capture all of the surplus previously going to consumers. The firm will still produce the same amount of drugs, as marginal cost is still constant.

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