Question

Task 2
Explain why the boundary cost curve (MC) intersects the curves for average total cost
(AC) and average variable cost (AVC) where these are at their lowest level. Illustrate with
a figure.

Task 3
Describe market forms monopoly and monopolistic competition in pricing,
profit and socio-economic profitability. Feel free to compare with the free competition model.


Exercise 4
Suppose that cheese and ham are perfect substitutes and that they are produced by two independent producers
which we can call Ola and Svein. Demand is given by the inverse demand function
P = A - X
where A is a constant and X = x1 + x2 is the total production of cheese and ham. Suppose further that Ola has
cost function C1 (x1) = 10x1, while Svein has cost function C2 (x2) = 20x2. Fast
costs we disregard.
a) Suppose that A equals 90. Determine the market price, the quantity of cheese and ham traded, and the profit
to Ola and Svein if they compete with quantity as a strategic variable (Cournot competition).
b) What will be the answers to the questions under (a) if A equals 60?
c) The constant A can be regarded as an (imprecise) indicator of market size. Know the answers
(a) and (b) tell us something about the importance of market size for efficiency and welfare when it comes
is imperfect competition in the markets? Explain.

Exercise 5
Suppose bread and jam are perfect complements, ie they are always used in a one-to-one ratio and in
form of bread slices and jam portions. These are the only items that consumers buy.
a) Explain why the demand for bread (x1) and the demand for jam (x2) can
is expressed in the form
??1 = ??
??1 + ??2
and ??2 = ??
??1 + ??2
where Y is the income, while p1 and p2 are the price of bread and jam respectively.
b) Explain, and preferably also analytically, that if the price of bread is equal to the price of jam, so is
the price elasticity of bread demand (the elasticity of x1 with respect to p1) equals –1/2.
c) What are the cross-price elasticities (the elasticities of x1 with respect to p2, and x2 with respect to
on p1)? Explain

Answer 1

The Marginal cost is the incremental cost incurred with the production of each additional unit of a commodity while the average cost is the total cost per unit of output. When the MC is falling and below the AC, it pulls the average cost down, but when the MC starts increasing and exceeds the AC, it pulls up the AC simultaneously. The point of intersection between the MC and AC curves is the minimum of the AC curve. At this point, the cost of the marginal output is equal to the average cost of the output, thus the AC neither falls nor rises (i.e. it reaches its minimum).