Question

Vaxis Pharmaceuticals has one product, Vaxim, that it sells in two nations, Northland and Southland. The marginal cost of producing Vaxim is 0. Northland is a small country with a regulated health care system. Patients obtain all prescription drugs free of charge. Northland’s government purchases exactly 200 units of Vaxim and agrees to pay Vaxis $100 per unit. It distributes Vaxim to local retail pharmacies which receive an additional $10 fee for each prescription filled (making the effective price $110). Southland has an unregulated healthcare market. Vaxis sets its own price in Southland, where the demand curve for Vaxim is P = 1000 – Q.

a) Suppose that there is no importation of Vaxim from Northland to Southland. What price should Vaxis charge in Southland? Suppose that Southland permits “importatation” of Vaxim from Northland. Southland pharmacies may purchase Vaxim from Northland pharmacies at the low Northland price of $110 (or close to it) and then sell it in Southland at whatever price the market will bear. The only constraint on importation is the willingness of Northland pharmacies to sell to Southlanders.

b) Southland pharmacies are able to import half the Vaxim intended for the Northland market (100 units). They sell it at just below the price that Vaxis sets in Southland, so as to be certain to sell all 100 units. What price should Vaxis set in Southland?

c) Would Vaxis be better off refusing to ship any drugs to Northland? Explain.

Answer 1

A. As the Nortland government can intervene into the price mechanism of vaxim. And they fix the price of that medicine on the $110. But in southland country there is no as such regulated health sector and the the denand also high for the sane medicine. so i think vaxus company can offer more price for the southland province. It will be much more than the price which is offers by the northland country. If Northland pharmacies are ready to sell this medicine to the southlanders they will ask for more pay because they know that by taking this vaxim on110$. Southland pharmacies will sell it on very much high rate. So they will ask for more compensation. This will also leads to the price changes in Southland because vaxis company can get the competition from their own products and it will may be reduced the prices.

B. If southland imported the 100 vaxim and sell its beliw the old prices. Then it will create losses for the vaxis company. I think for the other remaining medicine vexis try to maximize their gains and fix the price of medicine above the old prices so they can collect the losses. Abd maximize their profits and gains.

C. I thinks vaxis faces loss in Northland because they will get less money than they are getting from the southland country. So they are better off refusing to ship any drug to the Northland. This will create the less supply situation in Northland and it will hike the price of the drugs and this condition then directly benefits to the Vaxis company.