You’ve been hired as a new man.
- You’ve been hired as a new manager for a local restaurant. While the restaurant serves manythings, they are known for their wood-fired pizza and locally-sourced beer. Since both products aregenerally purchased at the same time, we consider them as complements. Thus, if you sell a lot ofpizza, you would also expect to sell a lot of beer and vice versa.
- Explain what pricing strategy, would you use to maximize profits. Use general terms for youranswer (high price, low price, etc)
- Now, let’s assume you’ve estimated the following profit function:
- ∏ = (P beer) (Q beer) + (P pizza) (Q pizza) – (C beer) (Q beer) – (C pizza) (Q pizza)
- You’ve also estimated the following equations:
- Q beer = 63 – 5(P beer) + P pizza
- Q pizza = 120 – 2(P pizza) + 2(P beer)
- C beer = 2
- C pizza = 5
- What is the profit maximizing price and quantity for pizza and beer? What is your profit? Hint: Find marginal profit with respect to P beer and P pizza, then use substitution.
