A City Has Two Newspapers

A city has two newspapers. Demand for either paper depends on its own price and the price of its rival. Demand functions for papers A and B respectively, measured in tens of thousands of subscriptions, are 21 - 2P_a + P_b and 21 + P_a 2 2P_b. The marginal cost of printing and distributing an extra paper just equals the extra advertising revenue from another reader, so each paper treats marginal costs as zero. Each paper maximizes its revenue assuming that the other's price is independent of its own price. If the papers enter a joint operating agreement where they set prices to maximize total revenue, by how much will newspaper prices rise?

A) $3
B) $2
C) $0
D) $3.50
E) $2.50

Correct Answer:

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