Question.

a). Consider a product, childrens bike, sold to customers in two cities, A and B. After some customer research, the bike maker has determined the following:

Total Potential Customers in City A = 60 (measured in thousands)

Total Potential Customers City B = 100 (measured in thousands)

Maximum willingness to Pay, Customers City A = $240

Maximum willingness to Pay, Customers City B = $200

(Note: Each customer buys one bike)

Suppose you are asked to advise the bike maker on pricing the bikes. Since the cities are not in close proximity, you decide that the two city markets are completely independent and it is possible to choose different prices for the bikes for the two cities. The Total Cost of producing the bikes = 1000 + 40*Q, where Q is the total number of bikes sold.

What price would you choose and what would be the firms profit?

b). Suppose instead, the two cities were sufficiently close to be considered one market. Thus the bikes would have to be sold at the same price in both cities. What Price would you recommend? (Hint: You can solve the same problem above, but impose the condition that the price in the two cities are equal. In solver, (assuming that the prices are in cells C1 and C2) you can impose this condition by adding the constraint (see screenshot next page):