Suppose that BMW can produce any quantity of cars at a constant marginal cost equal to $50 and a fixed cost of $22,500. You are asked to advise the CEO as to what prices and quantities BMW should set for sales in Europe and in the United States to maximize its profits. The demand for BMWs in each market is given by: QE = 8,000 – 80PE and QU = 4,000 – 20 PU, where the subscript E denotes Europe, the subscript U denotes the United States. Assume that BMW can restrict U.S. sales to authorized BMW dealers only. Support your answers graphically as well. a. If, by an international agreement between Europe and United States, BMW were forced to charge the same price in each market, what would be the quantity sold in each market, the equilibrium price, and the company’s profit? b. Suppose now that Europe and United States signed a new trade package under which BMW now can charge different prices across the two markets. What quantity of BMWs should the firm sell in each market, and what should the price be in each market? What should the total profit be? (Note: Suppose BMW is restricted to set a uniform price per car in each market, respectively.)
Suppose that BMW can produce any quantity of cars at a constant marginal cost equal to
$50 and a fixed cost of $22,500. You are asked to advise the CEO as to what prices and
quantities BMW should set for sales in Europe and in the United States to maximize its profits.
The demand for BMWs in each market is given by:
QE = 8,000 – 80PE and QU = 4,000 – 20 PU,
where the subscript E denotes Europe, the subscript U denotes the United States. Assume that
BMW can restrict U.S. sales to authorized BMW dealers only. Support your answers
graphically as well.
a. If, by an international agreement between Europe and United States, BMW were
forced to charge the same
b. Suppose now that Europe and United States signed a new trade package under which
BMW now can charge different prices across the two markets. What quantity of BMWs
should the firm sell in each market, and what should the price be in each market? What
should the total profit be? (Note: Suppose BMW is restricted to set a uniform price per
car in each market, respectively.)
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