Unformatted text preview: ing 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.
(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.
(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?
(e) Assume Pepsi’s actual capacity is 75% of the value you calculated in part (d). Use your answers to part (a) to solve for
Pepsi’s optimal uniform price and output in 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 (d) 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 (d)).
(f) Assume Pepsi’s actual capacity is 75% of the value you calculated in part (d). What is Pepsi’s optimal uniform price
and output if the government requires Pepsi to behave “as if it is perfectly competitive” in 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 (d) 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 (d)).
(j) Suppose that after Pepsi has produced 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 falle...
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This document was uploaded on 01/19/2014.
 Fall '14

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