The WWQX Co.sells shirts.Shirts with the company label on the tag are perceived to be of higher quality than shirts with the store's label.Yet,shirts are of identical quality regardless of the label.The demand for perceived high-quality shirts is p_h = 80 - q_h.The demand for perceived low-quality shirts is p_l = 19 + p_h - q_l.The firm can produce shirts at TC = 2q_h + 2q_l.How many shirts does the firm label as low quality and how many as high quality? What prices are charged? A) q_l = 29; q_h = 39 B) q_l = 39; q_h = 79 C) q_l = 19; q_h = 25 D) q_l = 20; q_h = 18

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Quizplus · Accepted Answer

To solve this, we first need to find the profit-maximizing quantity for both high-quality (perceived) and low-quality (perceived) shirts. The total cost (TC) function is given as TC = 2q_h + 2q_l. The demand functions for high-quality and low-quality shirts are given, which allows us to derive the revenue functions for both. By setting the marginal revenue equal to marginal cost for each type of shirt and solving the system of equations, we find the quantities that maximize profit. The correct quantities, as given in option A, are q_l = 29 and q_h = 39. The prices can then be found by substituting these quantities back into the demand equations.