Question

You manage a farm that is looking to sell oranges in both California and Oregon. The demand for oranges in California is given by P^CA = 25 - 0.5Q_^CA and the demand for oranges in Oregon is P^OR = 19 - 0.3Q^OR. The total cost of selling oranges is TC = 10 + Q and the marginal cost is constant at MC = $1. If you cannot differentiate between customers in California and Oregon, and you are forced to charge the price that is optimal in California in both Oregon and California, how much profit will you lose compared to the profit you made in (2)? (Write answer without the negative sign nor the dollar sign.)

Answer 1

Firstly e can see the two markets as -

We can see that both California and Oregon have different prices but if we charge the equilibrium price of California i.e. $13 in both the markets. It will not change anything in Californea but due to higher prices the demand and hence revenue and hence profit will decrease in Oregon.

At price of $13, quantity demanded in Oregon is 13=19-0.3Q or Q = 6/0.3 = 20. Hence New revenue = 13×20 = $260 but previously revenue was 10×30 = $300. Since the cost has not changed so change in revenue is the change in profit = 300 - 260 = $40.