Question

PC Connection and CDW are two online retailers that compete in an Internet market for digital cameras. While the products they sell are similar, the firms attempt to differentiate themselves through their service policies. Over the last couple of months, PC Connection has matched CDW’s price cuts,but has not matched its price increases. Suppose that when PC Connection matches CDW’s price changes, the inverse demand curve for CDW’s cameras is given by P=1,225-2Q. When it does not match price changes, CDW’s inverse demand curve is P=775-0.5Q. Based on this information, determine CDW’s inverse demand function over the last couple of months.

P=( )-( ) Q if <300

( )-( ) Q if <300

Over what range will changes in marginal cost have on effect on CDW’s profit-maximizing level of output?

$( ) to $( )

Answer 1

For quantity less than 300, the demand curve should be elastic (implying that the maximum price should be relatively lower). Hence demand is P = 775 - 0.5Q

For quantity greater than 300, the demand curve should be inelastic (implying that the maximum price should be relatively higher). Hence demand is P = 1225 - 2Q

Hence,

P = (775) - (0.5) Q if <300

= (1225) - (2) Q if > 300

Find the range for marginal cost using marginal revenue

MR1(Q = 300) = 775 - 300 = $475

MR2(Q = 300) = 1225 - 4*300 = $25

Hence the range is $25 to $475