2. Suppose that there is one brand-name type of aspirin (Bayer, the first to market it in 1899) selling X and a large number of competing generic aspirin manufacturers collectively selling Y containers of aspirin. Think of X and Y as measured in standardized pill containers of 100 pills each. Assume the marginal cost throughout is $1 per pill container. For historic reasons, Bayer is the most popular form of aspirin, and hence has half of the market. Assume that the ordinary demand curves for X and Y can be written as X = 499 - 2Px + Py Y = 499 + Px -2 Py %3D a) Assume initially that the market for all aspirin is perfectly competitive, and that Bayer is a price taker, just like all of the generic sellers. What must the prices Px and Py be? How much aspirin is sold as X and Y? b) Now assume that the generic producers remain competitive and continue to sell at the price Py just determined. Assume Bayer takes this price as given when choosing Px. What is the profit maximizing price Px and quantity X sold for Bayer? Show your solution method. c) Is this a signaling equilibrium in which price is taken as a signal of quality? Explain.
2. Suppose that there is one brand-name type of aspirin (Bayer, the first to market it in 1899) selling X and a large number of competing generic aspirin manufacturers collectively selling Y containers of aspirin. Think of X and Y as measured in standardized pill containers of 100 pills each. Assume the marginal cost throughout is $1 per pill container. For historic reasons, Bayer is the most popular form of aspirin, and hence has half of the market. Assume that the ordinary demand curves for X and Y can be written as X = 499 - 2Px + Py Y = 499 + Px -2 Py %3D a) Assume initially that the market for all aspirin is perfectly competitive, and that Bayer is a price taker, just like all of the generic sellers. What must the prices Px and Py be? How much aspirin is sold as X and Y? b) Now assume that the generic producers remain competitive and continue to sell at the price Py just determined. Assume Bayer takes this price as given when choosing Px. What is the profit maximizing price Px and quantity X sold for Bayer? Show your solution method. c) Is this a signaling equilibrium in which price is taken as a signal of quality? Explain.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:2. Suppose that there is one brand-name type of aspirin (Bayer, the first to market it in 1899) selling X
and a large number of competing generic aspirin manufacturers collectively selling Y containers of
aspirin. Think of X and Y as measured in standardized pill containers of 100 pills each.
Assume the marginal cost throughout is $1 per pill container.
For historic reasons, Bayer is the most popular form of aspirin, and hence has half of the market.
Assume that the ordinary demand curves for X and Y can be written as
X = 499 - 2Px + Py
Y = 499 + Px -2 Py
a) Assume initially that the market for all aspirin is perfectly competitive, and that Bayer is a price taker,
just like all of the generic sellers. What must the prices Px and Py be? How much aspirin is sold as X and
Y?
b) Now assume that the generic producers remain competitive and continue to sell at the price Py just
determined. Assume Bayer takes this price as given when choosing Px. What is the profit maximizing
price Px and quantity X sold for Bayer? Show your solution method.
c) Is this a signaling equilibrium in which price is taken as a signal of quality? Explain.
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