ESSENTIALS OF ECONOMICS
4th Edition
ISBN: 9781464188466
Author: KRUGMAN
Publisher: Norton, W. W. & Company, Inc.
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Question
Chapter 9, Problem 1P
To determine
Concept Introduction:
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.
Expert Solution & Answer
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.
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