Question

Suppose that Wegboys has a supermarket with a downward sloping demand curve in Pilgrim City. It purchases frozen turkeys at a constant wholesale price of $1/turkey, which is its full marginal cost for supplying turkeys. During July, only a small number of wealthy people are interested in buying turkeys in Pilgrim. Their demand curve is P = 10 – .02 Q, where P is Wegboys’ retail price for turkeys during the month and Q is the quantity of turkeys purchased. The demand curve for these wealthy people is constant – it is the same curve in both November and July. During November, a large number of less wealthy people enter the market to purchase turkeys for Thanksgiving. Their demand curve for Wegboys’ turkeys is P = 4 – .0005Q. In other months of the year, they do not purchase turkeys at any price.

a. What price should Wegboys charge in July to maximize its profits? Calculate its profits from turkey sales

b. Demonstrate that Wegboys can earn a higher profit if it lowers its retail price for turkeys during November (you can do this without finding the optimal price). Explain the basic economic intuition.

Need A and B - thank you.

Answer 1