The market for energy drinks is dominated by two major producers: Red Monster and Bull.

Knowing that their products are weakly differentiated, the companies have found a way to

sustain prices well above their marginal costs through tacit collusion. While the marginal

costs equal $4 for a 12-pack for either company, the companies have been charging $20 for a

12-pack in the recent years.

a. Suppose that the price that the two companies chose, $20, is the price that maximizes the

industry's profits (i.e., the price that a monopoly company would choose if it had the

same cost structure). What does this tell you about elasticity of demand for energy

drinks?

Knowing the importance of a healthy energy drink to students and faculty alike,

graduates of 2020 started a company that would produce a new energy drink from organic

ingredients using traditional recipes from world cultures. The marginal cost of the new drink

is going to be $7 per 12-pack (which is understandably higher than that of the major

competitors, both due to a smaller scale and higher quality ingredients). The new company

(and the drink itself) is named Brave Purple (BP). Through market research,

you established that demand for the new drink in Mebourne is well-described by the following formula:

()=15010 ()+6()

where () is Brave Purple's price, () is the price charged by Red Monster and Bull

and Q(BP) is the quantity demanded, in units per day.

Since Red Monster and Bull are national brands and Brave Purple is a small local competitor,

you have reason to believe that Brave Purple's pricing decisions will either be unnoticed by

the two major companies, or in any case they would not be a sufficient reason to upend the

tacit collusion and risk a price war.

b. How would you price the new product? What quantity would you produce and what

would be your profit?