Question

A pharmaceutical firm faces the following monthly demands in the U.S. and Mexican markets for its only patented drug: U.S. Demand: Mexico Demand: where quantities Q represent the number of prescriptions per month in millions and the prices P are denominated in U.S. dollars (i.e., the Mexican demand has already been adjusted for the dollar/peso exchange rate). The marginal cost of the drug is constant at $2 per prescription in both markets.

a) Suppose that arbitrage between the markets is impossible, so the firm is able to charge different prices in each market. If the firm practices third degree (i.e., verifiable characteristics) price discrimination, what price will it charge in the U.S.? What price will it charge in Mexico? How much will it produce and sell in the U.S.? How much will it produce and sell in Mexico? What are the firm's total profits from the sale of the drug in this case?

b) Now suppose the firm cannot prevent arbitrage between the countries, so it is forced to charge the same price in the U.S. and Mexico. What price will it charge for the drug? How much will it produce and sell overall? What are the firm's total profits from the sale of the drug in this case?

c) Now suppose Congress is considering a law that would make arbitrage legal between the U.S. and Mexico (i.e., the law would allow for the importation and sale of drugs from Mexico to the U.S.). How much would the pharmaceutical firm spend per month on lobbying efforts to defeat this law, given your answers to parts (a) and (b).

Answer 1

Shifts in demand or supply for the Mexican peso in the foreign exchange market can occur due to changes in investor expectations, interest rates, economic indicators, political stability, and trade balances, affecting the equilibrium exchange rate of the peso against the U.S. dollar.

Step-by-step explanation:

The factors that could cause shifts in the demand or supply for the Mexican peso, leading to a change in the equilibrium exchange rate with the U.S. dollar. In the foreign exchange market, the intersection of the demand and supply curves for a currency determines the equilibrium exchange rate. If investor expectations about the future value of the Mexican peso shift, perhaps due to a news article predicting an appreciation of the peso, this could cause a rightward shift in demand (people would want to hold more pesos) and a leftward shift in supply (people would be less willing to sell their pesos). These shifts would lead to a higher equilibrium exchange rate, meaning each peso would be worth more in U.S. dollars.

Other factors that can lead to shifts in the demand and supply of pesos could include changes in interest rates, economic indicators, political stability, and trade balances.