Problem #1

The marginal cost are MC=$ 5 per day and fixed cost are FC=$ 30,000 per year. The

demand for the large and small company are given as follows:

P L=805−4 Q L

PS =485−6 QS

(a) The trucking company charges the same price to both food distributors

irrespective of their size. In this case we have that P L=P S:

3
805−4 Q L =485−6 Q S ⇒320−4 Q L =−6 Q S ⇒ 4 QL =320+6 Q S ⇒ Q L =80+ Q S .
2

Total revenue:

TR L=P L Q L=805Q L −4 Q2L

TR S=PS Q S=485 Q S−6 Q2S

Marginal revenue:

MR=485−12 QS

Optimal price:

480
MR=MC ⇒ 485−12Q S=5 ⇒12 Q S=480 ⇒Q S = =40⇒
12

3
⇒ Q L =80+ ∙ 40=80+60=140.
2

The graph:
 The price will be:

P=P S=485−6 ∙ 40=485−240=245

Answer: Price should be $245. Quantity (number of days) should be 140 days for large

company and 40 days for small company.

(b) Total revenue:

TR L=P L Q L=805Q L −4 Q2L

TR S=PS Q S=485Q S−6 Q2S

Marginal revenue:

MR L =805−8 QL

MR S=485−12 QS
 Optimal price:

80 0
MR L =MC ⇒ 805−8 Q S=5 ⇒8 Q S =80 0 ⇒Q L= =10 0
8

480
MR S=MC ⇒ 485−12 Q S=5⇒ 12Q S =480 ⇒ Q S= =40
12

The graph:

The price will be:

P L=805−4 ∙100=805−400=405.

PS =485−6 ∙ 40=485−240=245.

Answer: The price for large company should be $405, the quantity – 100 days. The price for

small company should be $245, the quantity – 40 days.

 (c) As we have found in part (a), the price and quantity for large and small

company should be ($245,140) and ($245,40) respectively.

In this case total cost and total revenue will be:

TC=30000+5 Q L +5Q S=30000+ 5∙ 140+5 ∙ 40=30900

TR=TRL +TRS =805 Q L −4 Q 2L + 485 Q S −6 Q 2S =¿

¿ 805 ∙140−4 ∙1 96 00+ 485 ∙ 40−6 ∙ 1600=44100

In this case:

TP=TR−TC=44100−30900=13200.

Answer: the total profit will be equal $13,200.

(d) As we have found in part (b), the price and quantity for large and small

company should be ($405,100) and ($245,40) respectively.

In this case total cost and total revenue will be:

TC=30000+5 Q L +5Q S=30000+ 5∙ 1 0 0+5 ∙ 40=30 7 00

TR=TRL +TRS =805 Q L −4 Q 2L + 485 Q S −6 Q 2S =¿

¿ 805 ∙1 0 0−4 ∙ 10000+ 485∙ 40−6 ∙ 1600=50300

In this case total profit will be:

TP=TR−TC=503 00−30 7 00=196 00.

Answer: the total profit will be equal $19,600.

 (e) Total profit in the first case is $13,200. Total profit in second case is $19,600.

As we can see the best choice is to identify food distributors by size and charge price $405

and $245 for large and small company respectively (the quantity will be 100 and 40 days

respectively).

Answer: identify food distributors by size.

Problem #2

Demand:

Q D=400−50 P

Fixed cost: FC =$ 100,000.

Optimal price: P=$ 5.5 per bottle .

Marginal cost are constant.

(a) Optimal quantity:

Q D=400−50 ∙ 5.5=125 ( thousands of bottles ) .

The revenue will be:

QD
TR=QD P=Q D ∙ 8− ( 50 )
=8 Q D−0.02 Q2D ⇒ MR=8−0.04 QD =MC ⇒

⇒ 8−0.04 ∙ 125=8−5=3 .

Total cost:

TC=100000+3 Q D
 Total profit:

TP=TR−TC=125000 ∙5.5−100000−3 ∙ 125000=687500−475000=212500.

Answer: total profit is $212,500.

(b) We have:

300+25 P S−Q P
P P=
50

300+25 PS −2 Q P
MR P= =3 ⇒ 300+25 P S−2 Q P =150 ⇒ 2Q P−25 P S=150.
50

1300−Q P−20Q S
MR S= =2.25 ⇒ QP =681.25−20Q S .
275

23 QP +10 Q S=2950 ⇒Q P=115.97 ,Q S=28.26 .

PS =$ 3.278

P P=$ 5.32

Answer: Prices of the juice for Sambazon and POM Wonderful equal $3.3 and $5.3

respectively and quantity equal 28 and 116 bottles.

(c) If consumers perceive the juice from POM Wonderful and Sambazon to

virtually indistinguishable the prices will be almost equal and quantity will be also almost

equal.