A pharmaceutical company is the only seller of a prescription allergy medication. Demand for the drug in California is given by Q(P)=240-6P. The cost function is C(Q)=4Q. A.
Assume the company only sells the drug in California and that it charges a uniform price. Calculate the profit-maximizing quantity and price. Calculate the deadweight loss due to monopoly.
Draw a diagram that shows the monopoly quantity and price, the quantity and price that would maximize total surplus, and the deadweight loss due to monopoly.
Now assume the company expands to also sell in Nevada. Demand for the drug in Nevada is given by Q(P ) = 90 −10P . State laws forbid shipping drugs across state lines. What prices will the company charge in Nevada and in California to maximize its profits? What quantities does the company sell in each state?
