You are CEO of Eastco, and you recently paid $58,000 or about 2x revenue (well under industry average) to purchase Westco, which makes a product nearly identical to yours. This move will allow you to operate in both regions (East and West) of the country.

If you combine the markets, the total Fixed Cost would be $11,000 per month, and your larger purchase size will allow you to advantageous terms for your raw materials, meaning VCwill be $4 per unit.

Demand and MRin the combined market is as follows:

Qd= 600 6P

MR= 100 0.333Q

a) Compute your profit in the combined market.

Additional analysis shows that demand and fixed costs are different in the 2 regions.

The West has the following demand and Mg:

Qd= 300 4P

MR= 75 0.5Q

Fixed costs associated with operating in the West are $5000/month.

While the East is a less price sensitive market:

Qd= 300 2P

MR= 150 Q

Fixed costs associated with operating in the East are $6000/month.

The area manager from the East suggests you use a strategy that charges each market a separate price. If you operate in separate markets, the VCassociated with each unit is $5.

b) Calculate your profits using this strategy. What is this strategy called?

c) What strategy do you suggest in the Long Run?