A weapons producer sells guns to two countries that are at war with each other. The guns can be produced at a constant marginal cost of $10. The demand for guns from the two countries can be represented as:
QA = 100 - 2p
QB = 80 - 4p
Why is the weapons producer able to price discriminate?
What price will it charge to each country?
The firm can price discriminate because there are two identifiable segments with different elasticities. Since the two countries are at war, resale is doubtful. To solve, find marginal revenue for each and set equal to marginal cost of $10.
MRB = 20 - (1/2 )QB = 10 or QB = 20 and pB = 15.
MRA = 50 - QA = 10 or QA = 40 and pA = 30.
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