ajaz_eco_204_2012_2013_chapter_17__18_PP

# Eco 204 s ajaz hussain do not distribute in

This preview shows page 1. Sign up to view the full content.

This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: ge values of all variables except Pepsi’s price (i.e., we are doing ceteris paribus: holding all other variables constant). Substitute average values: ( ) ( ) ( ) ( ) 12 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. ( In spring/summer, ) ( ) . Therefore, Pepsi’s demand curve in spring/summer is: () In fall/winter, . Therefore, Pepsi’s demand curve in spring/summer is: () 13 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. (d) 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 capacity 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: ( ) ( ) () 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: 14 ECO 204 Chapter 17 & 18: Practice Problems & Solutions for Firms with Market Power: Busine...
View Full Document

## This document was uploaded on 01/19/2014.

Ask a homework question - tutors are online