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Imagine that Gillette has a monopoly in the market for razor blades in Mexico. The market demand curve for blades in Mexico is P = 968 - 20Q, where P is the price of blades in cents and Q is annual demand for blades expressed in millions. Gillette has two plants in which it can produce blades for the Mexican market: one in Los Angeles and one in Mexico City. In its L.A. plant, Gillette can produce any quantity of blades it wants at a marginal cost of 8 cents per blade. Letting Q1 and MC1 denote the output and marginal cost at the L.A. plant, we have MC1(Q1) = 8. The Mexican plant has a marginal cost function given by MC2(Q2) = 1 + 0.5Q2.
a) Find Gillette's profit-maximizing price and quantity of output for the Mexican market overall. How will Gillette allocate production between its Mexican plant and its U.S. plant?
b) Suppose Gillette's L.A. plant had a marginal cost of 10 cents rather than 8 cents per blade. How would your answer to part (a) change?
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