Answer to Question #26599 in Economics of Enterprise for Eric

Question

5. A small firm traps rabbits for their fur and feet. Each rabbit yields one pelt and two feet (only the hind feet are suitable for the "lucky rabbit's feet"). The demand for pelts is:
PP = 2.00 - 0.001QP

and the demand for rabbit's feet is given by:

PF = 1.60 - 0.001QF

The marginal cost of trapping and processing each rabbit is $0.60.

a. What are the profit-maximizing prices and quantities of pelts and rabbit's feet?

b. If the demand for rabbit's feet is PF = 1.00 - 0.001QF, how do your answers change? Explain.

Answer 1

a. What are the profit-maximizing prices and quantities of pelts and rabbit's feet?
QP = 2000 - 1000PP,
QF = 1600 - 1000PF,
In equilibrium QP = QF,
2000(PP + PF) = 3600
PP + PF = 1.8 = MR = MC = P - is the equilibrium price of the whole rabbit Q = 1.8/0.6 = 3 rabbits can be processed - it is the
equilibrium quantity.
b. If the demand for rabbit's feet is PF = 1.00 -0.001QF, how do your answers change? Explain.
QF = 1000 - 1000PF
Now we repeat our calculations from the answer for question a.
In equilibrium QP = QF,
2000(PP + PF) = 3000
PP + PF = 1.5 = MR = MC is our new equilibrium price.
Q = 1.5/0.6 = 2.5 is our new equilibrium quantity.