a) Suppose that Coke currently sells Q bottles of Coke per day in Toronto. It current charges $1.50 per bottle. If it lowers price by 10 cents to $1.40 on every bottle than it expects to sell 100,000 additional bottles per day.
(i) Calculate marginal revenue as a function of Q.
(ii) If marginal cost is constant and equal to $0.40 per bottle then calculate for what levels of Q a price cut increases profits.
b) Bob is a monopolist who charges P = $60. At the current level of output MC = AC = $42. Bob estimates that a 2% change in price will cause a 5% change in quantity demanded.
(i) Calculate elasticity and marginal revenue
(ii) Is Bob maximizing profits? If not then should Bob increase or decrease price to increase profits? Explain.