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Unformatted text preview: n 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.
(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?
(i) Assume Pepsi’s actual capacity is 75% of the value you calculated in part (h). Use your answers to part (a) to solve for
Pepsi’s optimal 1st degree price discrimination prices and total output for spring/summer and fall/winter. State all
assumptions, show all calculations, and derive all figures up to two decimal places. Note: Only if you could not solve for
2
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. optimal capacity in part (h) then assume capacity
of the maximum market size (this is not necessarily the
optimal capacity and you should only use this figure if you couldn’t solve part (h)).
Question 17.3 The Prestigious Ajax Company (PAC) consists of two divisions “1” and “2”. Each division produces the
same product using labor ( ) and fixed capital ( ) as inputs but with different technologies. Division 1 produces output
according to: While division 2 produces output according to: Assume both divisions have ample capacity and produce and sell output in distinct markets. Currently
and
(a) Characterize each division’s “returns” (i.e. increasing, constant, or decreasing...
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