Suppose that demand for caustic soda in Freedonia is given by D(P) = 10000 - 2P, where the quantity demanded is measured in units per year and the price P is in $ per unit. The market for caustic soda in Freedonia is perfectly competitive and consists of many price-taking firms each operating an identical plant. Caustic soda production requires chlorine which all plants must buy from a monopolist named Freedonia Chlorine Corporation (FCC). FCC can produce chlorine at zero marginal cost and has no fixed costs. Producing one unit of caustic soda requires one unit of chlorine and FCC charges a price of PC per unit of chlorine. Caustic soda plants have constant marginal cost which is MC = $(PC + 1000). (For example, if PC = $200 then each plant has MC = $1200.) Suppose caustic soda firms have no fixed costs and there are no capacity constraints in the market. a. Suppose a new market opportunity opens up and FCC can now sell chlorine in Baldonia as a monopolist. Demand for chlorine in Baldonia is QB = 3400 - PC. FCC must charge the same price for chlorine in Freedonia and Baldonia. Suppose FCC has no capacity constraints. What is the profit maximizing price FCC charges for chlorine? b. What is the equilibrium price in the Freedonian caustic soda market? c. What is the equilibrium quantity in the Freedonian caustic soda market?
Caustic soda
Suppose that demand for caustic soda in Freedonia is given by D(P) = 10000 - 2P, where the quantity demanded is measured in units per year and the
Caustic soda production requires chlorine which all plants must buy from a monopolist named Freedonia Chlorine Corporation (FCC). FCC can produce chlorine at zero marginal cost and has no fixed costs.
Producing one unit of caustic soda requires one unit of chlorine and FCC charges a price of PC per unit of chlorine. Caustic soda plants have constant marginal cost which is MC = $(PC + 1000). (For example, if PC = $200 then each plant has MC = $1200.) Suppose caustic soda firms have no fixed costs and there are no capacity constraints in the market.
a. Suppose a new market opportunity opens up and FCC can now sell chlorine in Baldonia as a monopolist. Demand for chlorine in Baldonia is QB = 3400 - PC. FCC must charge the same price for chlorine in Freedonia and Baldonia. Suppose FCC has no capacity constraints. What is the profit maximizing price FCC charges for chlorine?
b. What is the
c. What is the equilibrium quantity in the Freedonian caustic soda market?
d. Is the
e. Suppose the situation is exactly as in part c) (ie FCC can sell chlorine in both Freedonia and Baldonia and must charge the same price) except that FCC can only produce 4200 units of chlorine this year. What is the profit maximizing price FCC charges for chlorine?
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