Chapter 9, Problem 1P

To determine

Concept Introduction:

Price Effect: After a change in price, each additional unit was sold at a changed price. This will result in an increase or decrease in revenue of the producer. This is known as the price effect on the revenue.

Quantity effect: After an increase or decrease in price, fewer units are sold which results in lower revenue. This is known as the quantity effect on the revenue.

Explanation of Solution

a. Price and Quantity effect for BASF.

• From the table, it is clear that if BASF will produce 10 more tons, then the price will fall from $4 to $3 per ton. So, with the fall in price BASF has to reduce price of each of the 40 tons.

• Price effect will be:

• Quality effect will be the price at which additional 10 tons were sold:

• As the marginal cost is zero, additional production will not incur any extra cost on BASF, but it will incur either loss or revenue due to an increase in production; therefore it has no incentive to produce 10 tons of an additional unit.

Conclusion:

Thus, the price effect is and the quantity effect is $30.

b. Price and Quantity effect for BASF when Roche enters the market:

• If BASF wants to produce 10 more tons then the price will fall from $4 to $3 per ton.

• Due to the duopoly type of market, with the fall in price, BASF must reduce the price on each of the 20 tons only.

• Price effect will be:

• Quality effect will be the price at which an additional 10 tons were sold:

• As the marginal cost is zero, the additional production will not incur any additional cost on BASF. Revenue will be increased by $10 with an increase in production.

Conclusion:

Thus, the price effect is and the quantity effect is $30.