ajaz_eco_204_2012_2013_chapter_12_Long_Run_CMP_PP

Recall that case b happens when case b when the demand

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Unformatted text preview: y zero? Answer We can use general solution to the PMP that we derived in question (5.1). “Optimal capacity” corresponds to the unconstrained maximum i.e. a solution whereby or when marginal profit due to expanding capacity slightly is zero. From question (5.1), only case B and case D corresponds to . Recall that case B happens when: Case B when () () The demand curve for Pepsi is: In spring/summer: In fall/winter: Therefore, marginal revenue for Pepsi is (using the short cut rule for linear demand curve): In spring/summer: 17 ECO 204 Chapter 12: Practice Problems & Solutions for The Long Run Cost Minimization Problem in ECO 204 (this version 2012-2013) University of Toronto, Department of Economics (STG). ECO 204, S. Ajaz Hussain. Do not distribute. ( ) ( ) () In fall/winter: () Note that . Therefore, clearly, both in spring/summer and fall/winter, () Thus case B is not a solution. Case D happens when Case D when () satisfying is () Therefore, optimal capacity can be solved from the equation: () In spring/summer: ( ( ( ) ) ) In fall/winter: ( Therefore, Pepsi’s optimal capacity is ) in spring/summer and in fall/winter. (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. Answer We already know that case A and B cannot be the solution. Therfore, the solution must be either case C or case D. 18 ECO 204 Chapter 12: Practice Problems & Solutions for The Long Run Cost Minimization Problem in ECO 204 (this version 2012-2013) University of Toronto, Department of Economics (STG). ECO 204, S. Ajaz Hussain. Do not distribute. For case C to be the solution, we need: () Case C when () In spring/summer, Pepsi’s capacity is: ( ) Marginal revenue is: ( () Note that ( ) )( ) . Therefore, () And as a result, case C is the solution. Therefore, Pepsi’s optimal output in spring/summer is: And, Pepsi’s optimal uniform price in spring/summer is: ( ) In fall/winter, Pepsi’s capacity is: ( ) Margin...
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This document was uploaded on 01/19/2014.

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