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Unformatted text preview: y for all units, so that the company
should produce the maximum output.
() Case C when
()
Case D
Need to check if
Start with the FOC:
()
()
Substitute
()
() This is the familiar ECO 100 “profit maximizing output”. It is, however, not the solution (that is
we need to the conditions under which
and
. From: ). For that ()
We see that whenever the output that solves
Case D when satisfying ()
() is between zero and full capacity.
is () (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
16 ECO 204 Chapter 12: Practice Problems & Solutions for The Long Run Cost Minimization Problem in ECO 204 (this version 20122013) University of Toronto, Department of Economics (STG). ECO 204, S. Ajaz Hussain. Do not distribute. = 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 capacit...
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This document was uploaded on 01/19/2014.
 Fall '14

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