This preview shows page 1. Sign up to view the full content.
Unformatted text preview: st, then
with decreasing or constant returns, marginal revenue exceeds marginal capacity for all units, so that the company
should produce the maximum output.
() Case C when
()
Case D
Need to check if
Start with the FOC:
()
()
Substitute
()
() This is the familiar ECO 100 “profit maximizing output”. It is, however, not the solution (that is
we need to the conditions under which
and
. From: ). For that ()
We see that whenever the output that solves
Case D when satisfying ()
() is between zero and full capacity.
is () 11
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. (b) In the paper “Econometric Analysis of Collusive Behavior in a SoftDrink Market” published in the Journal of
Economics and Management Strategy (Summer 1992), Gamsi, Laffont and Vuong (GLV) estimated the following demand
functions for Coke and Pepsi concentrate syrup based on quarterly data 1968 – 1986: The subscript is for Coke and is for Pepsi where:
= quarterly quantity of syrup sold
= price of syrup (1986 dollars)
= square root of quarterly advertising expenses (1986 dollars)
{
= real income (1986 dollars) The average values of the variables in the data set (except season) were:
● ̅̅̅̅ ● ̅̅̅̅ ● ̅̅̅ ● ̅̅̅̅ ● ̅̅̅ ● ̅̅̅̅ ●̅ GLV also estimated Coke and Pepsi’s average variable cost to be (these are constant across seasons):
● ● Assume Pepsi’s and Coke’s costs stem from manufacturing concentrate syrup only (think of Pepsi and Coke as producing
syrup for gate delivery).
What type of “returns to variable inputs” do Pepsi and Coke have? Give a brief explanation.
Answer
Since the is constant, Coke and Pepsi both have constant returns to variable inputs. (c) Derive Pepsi’s demand curve for spring/summer and fall/winter. State all assumptions, show all calculations, and
derive all figures up to two decimal places.
Answer
We can derive Pepsi’s demand curve by substituting the avera...
View
Full
Document
 Fall '14

Click to edit the document details