BigBook is a monopolist book publishing company, which sells books in Australia and New Zealand. Assume there is a 1:1 exchange rate between Australia and New Zealand. The inverse demand equations for Australia and New Zealand are as follows:
Australia: PA = 100 - 2.5QA
New Zealand: PZ = 80 - 12.5QZ
where PA is the price of a book in Australia, PZ is the price of a book in New Zealand, QA is the quantity of books consumed in Australia and QZ is the quantity of books consumed in New Zealand.
BigBook has one plant that produces books that is located in Australia. The cost of book production is as follows:
C= 5(QA+QB)
The cost of shipping books between New Zealand and Australia is $2 per book. However, there is a law prohibiting the resale of books between Australia and New Zealand.
BigBook decides to engage in third degree price discrimination.
What prices does BigBook set in Australia and New Zealand and what profit will be earned?
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