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Unformatted text preview: nto, Department of Economics (STG). ECO 204, S. Ajaz Hussain. Do not distribute. You must express all first order conditions and the conditions for the KuhnTucker various cases in terms of marginal
revenue and marginal cost only. State all assumptions and show all calculations.
(12.5)[PART B] In the paper “Econometric Analysis of Collusive Behavior in a SoftDrink Market” published in the
Journal of Economics and Management Strategy (Summer 1992), Gamsi, Laffont and Vuong (GLV) estimated the
following demand functions for Coke and Pepsi concentrate syrup based on quarterly data 1968 – 1986: The subscript is for Coke and is for Pepsi where:
= quarterly quantity of syrup sold
= price of syrup (1986 dollars)
= square root of quarterly advertising expenses (1986 dollars)
{
= real income (1986 dollars) The average values of the variables in the data set (except season) were:
● ̅̅̅̅ ● ̅̅̅̅ ● ̅̅̅ ● ̅̅̅̅ ● ̅̅̅ ● ̅̅̅̅ ●̅ GLV also estimated Coke and Pepsi’s average variable cost to be (these are constant across seasons):
● ● Assume Pepsi’s and Coke’s costs stem from manufacturing concentrate syrup only (think of Pepsi and Coke as producing
syrup for gate delivery).
(a) Assume Pepsi is a profit maximizer and charges a uniform price. What is Pepsi’s “optimal capacity” in spring/summer
and fall/winter? State all assumptions, show all calculations, and derive all figures up to two decimal places. Hint #1: If
Pepsi were to build the production facility for the first time, what capacity would it choose? Hint #2: When is the value
of expanding capacity zero?
(b) Assume Pepsi’s actual capacity is 75% of the value you calculated in part (a). Use your answers to (PART A) to solve
for Pepsi’s optimal uniform price and output in spring/summer and fall/winter. State all assumptions, show all
calculations, and derive all figures up to two decimal places.
(c) Assume Pepsi’s actual capacity is 75% of the value you calculated in part (a). What is Pepsi’s optimal u...
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 Fall '14

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