# Answer to Question #66493 in Microeconomics for coco

Question #66493

Two firms, a and b, produce and sell wine. The demand for

a's wine is given by the equation,

Qa = 200 - Pa + Pb:

In this equation, the price of a's wine is Pa per bottle, and the price of b's wine is

Pb per bottle. a has a marginal cost of MCa = $20 per bottle, and a fixed

cost of FCa = $6000. The demand for b's wine is given by the equation,

Qb = 9000 - 100Pb + 40Pa:

b has a marginal cost of MCb = $10 per bottle, and a fixed cost of FCb =

$10;000. The two firms compete by simultaneously selecting prices.

1) Are the bottles of wine produced by a and b, homo-

geneous products or heterogeneous products? Your answer must reference the two firms

demand functions.

a's wine is given by the equation,

Qa = 200 - Pa + Pb:

In this equation, the price of a's wine is Pa per bottle, and the price of b's wine is

Pb per bottle. a has a marginal cost of MCa = $20 per bottle, and a fixed

cost of FCa = $6000. The demand for b's wine is given by the equation,

Qb = 9000 - 100Pb + 40Pa:

b has a marginal cost of MCb = $10 per bottle, and a fixed cost of FCb =

$10;000. The two firms compete by simultaneously selecting prices.

1) Are the bottles of wine produced by a and b, homo-

geneous products or heterogeneous products? Your answer must reference the two firms

demand functions.

Expert's answer

Qa = 200 - Pa + Pb

Qb = 9000 - 100Pb + 40Pa

Price elasticity of demand

Ea(a)=(-1)

Eb(b)=(-100)

Cross-price elasticity of demand

Ea(b)=(1)

Eb(a)=(40)

|Ea(a)|=|Ea(b)|, however |Eb(b)|>|Eb(a)|, so wine b has some distinctive characteristics (different from price),comparing with wine a, that influence its demand. Wine b cannot be totally replaced with wine a by price competition.

Answer

Heterogeneous

Qb = 9000 - 100Pb + 40Pa

Price elasticity of demand

Ea(a)=(-1)

Eb(b)=(-100)

Cross-price elasticity of demand

Ea(b)=(1)

Eb(a)=(40)

|Ea(a)|=|Ea(b)|, however |Eb(b)|>|Eb(a)|, so wine b has some distinctive characteristics (different from price),comparing with wine a, that influence its demand. Wine b cannot be totally replaced with wine a by price competition.

Answer

Heterogeneous

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