You are CEO of a delivery truck agency serving the metro area of the town of Calurnia. You recently paid $58,000 or about 2x revenue (well under industry average) to purchase the delivery truck of the neighboring town of Caelid, which provides a service similar to yours. This move will allow you to operate in both regions (Calurnia and Caelid).

If you combine the markets, the total Fixed Cost would be $9,000 per month, and your larger purchase size will allow you advantageous terms for your raw materials, meaning your marginal cost will be $40 per delivery.

Demand and marginal revenue (MR) in the combined market is as follows:

Q_D = 110 0.25P MR = 440 8Q

a) Find the optimal price and quantity, and your profit from the combined market.

Additional analysis shows that demand and fixed costs are different in the two regions.

Calurnia has the following demand and marginal revenue:

Q_D = 65 0.125P MR = 520 16Q

Fixed costs associated with operating in the West are $5,000/month.

Although the demand in Caelid is smaller

Q_D = 45 0.125P MR = 360 16Q

Fixed costs associated with operating in the East are $4,000/month.

The area manager from Caelid suggests you use a strategy that charges each market a separate price. If you operate in separate markets, the marginal cost will increase to $44 per delivery.

b) What is this strategy called? Calculate the best price to charge in each city using this strategy and the combined profits. Have profits increased compared to the previous pricing method? What is this strategy called?

c) Examine the profits you are making from each city and provide advice on what this firm should do in the long run. How does the initial investment of $58,000 factor into your answer?