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Unformatted text preview: g 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: ()
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
ECO 204 Chapter 17 & 18: Practice Problems & Solutions for Firms with Market Power: Business Apps and Price Discrimination in ECO 204 (this version 2012-2013) University of Toronto, Department of Economics (STG). ECO 204, S. Ajaz Hussain. Do not distribute. 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. 21
ECO 204 Chapter 17 & 18: Practice Problems & Solutions for Firms with Market Power: Business Apps and Price Discrimination in ECO 204 (this version 2012-2013) University of Toronto, Department of Economics (STG). ECO 204, S. Ajaz Hussain. Do not distribute. (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
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)).
We already know that case A and B cannot be the solution. Therfore, the solution must be either case C or case D.
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 solutio...
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This document was uploaded on 01/19/2014.
- Fall '14