Return to question 16 The ion reports that annual sales of bakery goods last yea

Question

Return to question 16 The ion reports that annual sales of bakery goods last year rose 15 percent, driven by a 50 percent increase in the demand for bran muffins. Most of the increase was attributed to a report that diets rich in bran help cancer. You are the manager of a bakery that produces and packages gourmet bran muffins, and you currently sell bran muffins n packages of three. However, as a result of this new te -2Q. port, a typical consumer's inverse demand for your bran muffins is now P= 10 If your cost of producing bran muffins is qa-200, determine the optimal number of bran muffins to sellin a single package and the optimal package price. Enter your response for the optimal package price rounded to two decimal places Optimal package size: [0 units Optimal package price: $ 8

Explanation / Answer

16)

P = 10 - 2Q

C = 2Q

TR = PQ

= Q(10 -2Q)

= 10Q - 2Q2  

MR = 10 - 2Q

MC = 2

At optimal

MR = MC

10 - 4Q = 2

4Q = 8

Q = 2

P = 10 - 2Q

= 10 -2(2)

= 6

5)

a)

Ed of group 1 = -2

Ed of group 2 = -4

MC = 40

We know that

MR = MC at optimal point

MR = P(1 - 1/Ed)

so P(1 - 1/Ed) = MC

P1[1 -1 /2] = 40 taking absolute value of Ed

P1(1-1/2) = 40

P1/2 = 40

P1 = 80

similarly

P2(1-1/Ed) = MC

P2( 1 - 1/4) = 40

3P2/4 = 40

P2 = 160/3

= 53.33

The euation for markup is given by

P/MC = Ed/(Ed-1)

so markup for group1 = Ed/(Ed -1)

= 2/(2-1)

= 2

Markup for group 2 = 4/(4-1)

= 4/3

= 1.33

b)

Necessary condition for third degre price discrimination

(i) Firm must have monopoly power.

(ii) Market must be divided into different sub market.

(iii) Price elasticity of demand must be different in each sub market.

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