Question: A firm produces washing machines at a cost of $200 per unit. The demand for washing machines comes from two types of customers, those that already have an old washing machine at hoMeand are considering replacing it with a new one and those that don’t have one at home. Suppose, initially, that there is no market for the old machines (i.e., their market price is 0).

The demand for a new washing machine by those that do not have a machine at home is given by:

P = 2,000 – 0.5Q

The demand for a new washing machine by those who do have an old machine is given by:

P = 1,100 – Q.

(a) Assume now that the firm offers to buy consumers’ old machines at a price P^d (per unit) in return for their buying a new machine. What will be the (uniform) price that the firm will charge for a new machine (call it P^w) and what will be the price that the firm will pay for an old machine (P^d ) in this case? Calculate the firm’s profit in this case.

(b) How would your answers to part (b) above change if I told you that the firm can sell the old machines at a price of $300 per unit?