Banana Computer Company sells Banana computers in both the domestic and foreign markets. Because of differences in the power supplies, a Banana purchased in one market cannot be used in the other market. The demand and marginal revenue curves associated with the two markets are as follows:
Pd = 20, 000 − 20Q Pf = 25, 000 − 50Q
MRd = 20, 000 − 40Q MRf = 25, 000 − 100Q.
Banana’s production process exhibits constant returns to scale and it takes ______ to produce 100 computers.
(a) Banana’s long-run average cost function is AC(Q) = ______ and its long-run marginal cost function is MC(Q) = ______. Draw the average and marginal cost curves on the graph.
(b) Draw the demand curve for the domestic market in black ink and the marginal revenue curve for the domestic market in pencil. Draw the demand curve for the foreign market in red ink and the marginal revenue curve for the foreign market in blue ink.
(c) If Banana is maximizing its profits, it will sell ______ computers in the domestic market at ______dollars each and ______ computers in the foreign market at ______dollars each. What are Banana’s total profits? ______.
(d) At the profit-maximizing price and quantity, what is the price elasticity of demand in the domestic market? ______. What is the price elasticity of demand in the foreign market? ______. Is demand more or less elastic in the market where the higher price is charged? ______.
(e) Suppose that somebody figures out a wiring trick that allows a Banana computer built for either market to be costlessly converted to work in the other. (Ignore transportation costs.) On the graph below, draw the new inverse demand curve (with blue ink) and marginal revenue curve (with black ink) facing Banana.
(f) Given that costs haven’t changed, how many Banana computers should Banana sell? ______. What price will it charge? ______. How will Banana’s profits change now that it can no longer practice price discrimination? ______.