Question

Suppose that the demand for Prada in the United States is P = 40 – 2Qd, so that MR = 40 - 4Qd. Choose a value between one and eight that is the constant marginal cost.

(i) Derive Prada's profit-maximizing choice of quantity and price.

(ii) Suppose that demand in Canada is P = 20 – 2Qd, so that MR = 20 - 4Qd. What is the profit-maximizing choice of quantity and price in Canada?

(iii) Why might Prada be worried about resale? In which direction? Do you think that Prada solves its pricing problems in isolation, as above? What if the product is a car (not easily transported) or milk (quite perishable)?

Answer 1

MR = 40 - 4Q

Let MC = 4

1. Profit-maximizing level of output occurs where MR = MC

40 - 4Q = 4

Q = 9, P = 22

ii) MR = 20 - 4Q

Let MC = 4

At profit maximizing level of output, MR = MC
20 - 4Q = 4

Q = 4, P = 12

iii) Parada might be worried because in Canada, consumers can buy the product at lower price ($12) and then resale it in United States at price $22. In case of milk it would be hard to do because the milk can get contaminated. In case of car, transportation cost can be the deciding factor.