II . American Tire and Rubber Company sells identical radial tires under the fir
ID: 1121763 • Letter: I
Question
II . American Tire and Rubber Company sells identical radial tires under the firm's own brand name and to discount stores for private labeling. Marginal cost is a constant $10 per tire. regardless of the sub-market in which the tire is sold. The firnm has estimated the following demand curves for each of the markets PB = 70-0·0005QB PP = 20-0.0002QP Quantities are measured in thousands per month and price refers to the wholesale price. American currently sells brand name tires at wholesale price of $28.50 and private label tires for a price of $17. Are these prices optimal for the firm?Explanation / Answer
As MC is constant, thus for determining optimal prices we will set:
MRA = MRB = MC
Setting MRB = MC
It gives, 70 - 0.001QB = 10
-0.001QB = - 60
or, QB = 60,000
PB = 70 - (0.0005 * 60,000) = $40
Now setting MRP = MC
We have, 20 - 0.0004QP = 10
or, -0.0004QP = -10
It gives, QP = 25,000
PP = 20 - (0.0002 * 25,000) = $15
Because PB = $40; PP = $15, thus the prices are not optimal