Question

A company A segments its market by selling flat bread and round bread . The estimated inverse demand curves (which are independent) for each of these products are given as thus:

Flat bread ?=150−2?c, and

Round bread: ?=60−?r

MC for both inverse demand curves is $20.

• What is company A's profit and consumer surplus for bread type?
• Now find the ordinary demand curve and consumer surplus if company A is only able to estimate the total demand for both bread type instead of their separate demand functions?
• What would be company A profits if could identify not only which type of bread a customer demands but also buyer’s maximum willingness to pay for the preferred bread type ?

Answer 1

A)Flat bread

P=150-2Q

MR=150-4q

MC=20

150-4q=20

Q=130/4=32.5

P=150-2*32.5=85

Profit=(85-20)*32.5=65*32.5=2112.5

Consumer surplus=1/2*32.5*(150-85=0.5*32.5*65=1056.25

Round bread:

P=60-q

MR=60-2q

MC=20

60-2q=20

Q=40/2=20

P=60-20=40

Profit=(40-20)*20=20*20=400

Consumer surplus=1/2*20*(60-40)=10*20=200

Total profit=2112.5+400=2512.5

B) direct demand ( Flat bread):Q=75-0.5p

Direct demand ( round bread):Q=60-p

Market/ ordinary demand:Q=135-1.5p

Inverse market demand:p=90-Q/1.5

MR=90-2Q/1.5

MC=20

90-2Q/1.5=20

Q=70*1.5/2=35*1.5=52.5

P=90-52.5/1.5=55

Consumer surplus=1/2*52.5*(90-55)=0.5*52.5*35=918.75

C)