Suppose there are two firms,Boors and Cudweiser,each selling nonalcoholic beer.Suppose Boors and Cudweiser are not viewed as perfect substitutes but rather demand for Boors is QB = 5000 - 1000PB + 100PC and demand for Cudweiser is QC = 3000 - 1500PC + 100PB.For simplicity,assume zero marginal costs.Which is the more preferred beer?

Question

Quizplus · Accepted Answer

The preference for each beer can be inferred from the demand equations. For Boors, the coefficient of its own price (PB) is -1000, indicating that a price increase leads to a decrease in quantity demanded. However, the positive coefficient for Cudweiser's price (PC) in Boors' demand equation (+100) suggests that as Cudweiser's price increases, Boors' demand increases, indicating some level of substitutability. Conversely, for Cudweiser, the coefficient of its own price (PC) is -1500, and the coefficient for Boors' price (PB) in its demand equation is +100. The higher absolute value of Cudweiser's own price coefficient (-1500 vs. -1000 for Boors) suggests a higher sensitivity to price changes, which could imply a higher demand at lower prices, but it doesn't directly indicate preference. The key to determining preference is not directly stated in the demand functions' coefficients but rather in the interpretation of the demand levels and how consumers switch between beers as prices change. However, without explicit data on consumer satisfaction or utility, preference cannot be accurately determined from the given equations alone. Therefore, the assertion that Boors is more preferred is incorrect based on the provided explanation, as the demand equations primarily show how demand varies with price changes, not direct consumer preference. The correct interpretation should focus on the demand sensitivity to price changes and the cross-price elasticity implied by the coefficients, which indicates substitutability rather than direct preference.

Suppose There Are Two Firms,Boors and Cudweiser,each Selling Nonalcoholic Beer