Author Question: Suppose the demand for Pepsi is qp = 50 - 2pp + 1pc. The firm faces a constant marginal cost of m, ... (Read 92 times)

piesebel · **on:** Jul 1, 2018

Suppose the demand for Pepsi is qp = 50 - 2pp + 1pc. The firm faces a constant marginal cost of m, and denotes the price of Coke.

Assuming Bertrand behavior, derive Pepsi's best-response function and explain how the firm changes price in response to changes in its own marginal cost and changes in Coke's price.

Question 2

How could a manager use the information contained in this regression equation?

What will be an ideal response?

Zack0mack0101@yahoo.com · **Reply #1 on:** Jul 1, 2018

Answer to Question 1

For Pepsi, profit maximization means /pp = 50 + 2m - 4pp + pc = 0. Solving for pp yields Pepsi's best-response function: pp = 12.5 + (1/2 )m + (1/4)pc. A 1 increase in marginal cost yields a 0.50 increase in price. A 1 increase in Coke's price yields a 0.25 increase in price.

Answer to Question 2

Many answers are possible. A manager might note that demand is elastic, and thus that sales might respond to a price decrease. Likewise, sales should respond to increases in advertising. Sales are less likely to be impacted by income changes. The equation could be used to forecast expected sales based on changes in one or more of the variables. The equation could be used to help in coordinating production plans or with other parts of the firm.