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SHOW ALL WORK The SoSueMe Toy Company has a hot new toy called BabyDrone that it...

SHOW ALL WORK

The SoSueMe Toy Company has a hot new toy called BabyDrone that it sells in two markets. On the cost side the firm has fixed costs of $7,500 monthly. In addition, its variable costs are MC = AVC = $50 per toy. Assume that the SoSueMe Toy Company can engage in third-degree price discrimination and its goal is to maximize its profits.

The monthly demand in Market 1 where P1 is price in dollars is:

P1 = 410 – 6Q1, where Q1 is the quantity of the toy sold in market 1 monthly.

The monthly demand in Market 2 where P2 is price in dollars is:

P2 = 250 – 2Q2 where Q2 is the quantity of the toy sold in market 2 monthly

(a) (4 pts.) How many toys will be bought and sold in each market monthly?

ANSWERS: In Market 1: ___________ ; Market 2:       ___________

(b) (3 pts.) What price will be charged in each market?

      ANSWERS: Price in market 1:   ________ ; Price in market 2:   _________

(c) (3 pts.) And what are SoSueMe’s monthly profits?

ANSWER: ______________________

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Homework Answers

Answer #1

a) Market 1:

Equilibrium condition is where MR = MC

TR = P1.Q1 = (410 - 6Q1)Q1

TR = 410Q1 - 6Q12

MR = 410 - 12Q1

MC = 50

Equilibrium; 410 - 12Q1 = 50

12Q1 = 360

Q1 = 360/12

Q1 = 30 units

Market 2:

Equilibrium condition is where MR = MC

TR = P2.Q2 = (250 - 2Q2)Q2

TR = 250Q2 - 2Q22

MR = 250 - 4Q2

MC = 50

Equilibrium; 250 - 4Q2 = 50

4Q2 = 200

Q2 = 200/4

Q2 = 50 units

b) P1 = 410 - 6(30) = 410 - 180 = 230

P2 = 250 - 2(50) = 250 - 100 = 150

c) Profit = TR - TC

Profit of Market 1 = P1Q1 - (7500 + 50Q1) = 230 x 30 - 7500 - 50 x 30 = 6900 - 7500 - 1500 = 6900 - 9000 = - 2100

Profit of Market 2 = P2Q2 - (7500 + 50Q2) = 150 x 50 - 7500 - 50 x 50 = 7500 - 7500 - 2500 = - 2500

Total profit = - 2100 - 2500 = - 4600

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