BMW can produce any quantity of cars at a constant marginal cost equal to $20,000 and a fixed cost of $10 billion. 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. The demand for BMWs in each market is given by:

Q is at the bottom E = 4,000,000 - 100 P is at the bottom E and Q is at the bottom U = 1,000,000 - 20P its at the bottom U

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. Please note: All prices and costs are in dollars, NOT thousands of dollars.

a. 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?

b. If 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?

2. Eggbert Airlines (EA) flies only one route: Minneapolis-Honolulu. The demand for each flight is Q = 300 - P. EA's cost of running each flight is $5,000 plus $150 per passenger.

a. What is the profit-maximizing price that EA will charge? How many people will be on each flight? What is EA's profit for each flight?

b. EA learns that the fixed costs per flight are in fact $7,000 instead of $5,000. Will the airline stay in business for long? Illustrate your answer using a graph of the demand curve that EA faces, EA's average cost curve when fixed costs are $5,000, and EA's average cost curve when fixed costs are $7,000.

c. Wait! EA finds out that two different types of people fly to Honolulu. Type A consists of business people with a demand of QA = 160 - 0.4P. Type B consists of students whose total demand is QB = 140 - 0.6P. Because the students are easy to spot, EA decides to charge them different prices. Graph each of these demand curves and their horizontal sum. What price does EA charge the students? What price does EA charge other customers? How many of each type are on each flight?

d. What would EA's profit be for each flight? Would the airline stay in business?