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Unformatted text preview: ed but before any customers have purchased the total output in part (e), Pepsi
management finds out that the maximum willingness to pay for concentrate syrup has fallen by 50%. If Pepsi wants to
dispose the total output produced in part (e) by charging uniform prices, how much syrup should it sell? Assume there is
no secondary market for unsold syrup. State all assumptions, show all calculations, and derive all figures up to two
decimal places.
Answer
Spring/Summer:
Before the maximum willingness to pay (max WTP) had fallen, Pepsi produced
wtp, the demand curve becomes:
( )( units. With the fall in the max ) If Pepsi wants to dispose the total output produced in part (5.5) by charging uniform prices, then it must charge the
following price:
( ) Fall/Winter:
Before the maximum willingness to pay (max WTP) had fallen, Pepsi produced
wtp, the demand curve becomes: ( )( units. With the fall in the max ) If Pepsi wants to dispose the total output produced in part (5.5) by charging uniform prices, then it must charge the
following price:
( ) 19
ECO 204 Chapter 17 & 18: Practice Problems & Solutions for Firms with Market Power: Business Apps and Price Discrimination in ECO 204 (this version 20122013) University of Toronto, Department of Economics (STG). ECO 204, S. Ajaz Hussain. Do not distribute. (h) Assume Pepsi is a profit maximizer and charges 1st degree price discrimination prices. What is Pepsi’s “optimal
capacity” for 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?
Answer
Recall that in 1st degree price discrimination, the demand curve is the curve. 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 expandin...
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 Fall '14

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