Gas Guzzler Motors is one of three major auto producers. It is currently producing 6,000 cars a day, and selling them at a price of $10,000 each. Its marketing department tells it that its demand curve depends critically upon whether its competitors match its price changes. If they do not change their prices when GG does, schedule l will apply; if they match GG's price changes, schedule 2 will apply. The schedules are as follows:
Cars Schedule 1 Schedule 2
(in 000s) Price per car Price per car
1 $12,500 $15,000
2 12,000 14,000
3 11,500 13,000
4 11,000 12,000
5 10,500 11,000
6 10,000 10,000
7 9,500 9,000
8 9,000 8,000
9 8,500 7,000
10 8,000 6,000
a) Calculate the marginal revenue (for increments of thousands of cars) associated with each demand schedule.
b) Draw the two demand and MR curves on graph paper.
c) Assume now that, if GG raises its price, its competitors will not raise theirs, but that, if it lowers it price, they will match the price cuts. On the graph paper, show the effective demand curve and marginal revenue curve that face GG.