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

Let Antonio and Kate’s preferences be represented by the utility
functions, uAntonio(x1, x2) = 9((x1)^2)(x2) and uKate(x1, x2) =
17(x1)((x2)^2), where good 1 is Starbursts and good 2 is M&M’s.
Antonio’s endowment is eA = (24, 0) and Kate’s endowment is eK =
(0, 200). Antonio and Kate will exchange candy with each other
using prices p1 and p2, where p1 is the price of one starburst and
p2 is the price of one M&M.
a) Determine Antonio’s and Kate’s...

Bilbo can consume two goods, good 1 and good 2 where
X1 and X2 denote the quantity consumed of
each good. These goods sell at prices P1 and
P2, respectively. Bilbo’s preferences are represented by
the following utility function: U(X1, X2) =
3x1X2. Bilbo has an income of m.
a) Derive Bilbo’s Marshallian demand functions for the two
goods.
b) Given your answer in a), are the two goods normal goods?
Explain why and show this mathematically.
c) Calculate Bilbo’s...

Kate and Antonio meet in their school cafeteria and examine the
contents of their lunch boxes. Kate discovers a bag of M&Ms
while Antonio finds a package of Starburst. Suppose a market place
for candy has emerged in the school lunch room. The price of a
Starburst is 16 cents, p1 = 16, and the price of an M&M is 4
cent, p2 = 4. Antonio has 12 Starbursts and zero M&M’s. Kate
has zero Starbursts and 200 M&Ms. Suppose...

Consider a total cost function of TC = 0.5Q^2 +10Q + 20 and the
market demand function Q=70-p.
a What is the profit-maximizing output and price for the perfect
competition? Calculate its profit.
b What is the profit-maximizing output and price for the
monopolist? Calculate its profit.
c What is the profit-maximizing output and price for the
monopolist in the second market? Calculate its profit.

1Suppose the firm is a monopolist. It faces a downward-sloping
demand curve, P(Q). If it also has non-negative marginal cost, will
it choose a quantity on the demand curve where the price elasticity
of demand is less than, greater than, or equal to -1? Explain.
2. Now, consider what will happen if a firm has exactly one
competitor in the market. Both firms have identical technologies
and cost structures (assuming a constant marginal cost may be
helpful), and each chooses...

Suppose an industry demand curve is P = 90 − 2Q and each firm’s
total cost function is C = 100 + 2q 2 .
(a) (6 points) If there is only one firm in the industry, find
the market price, quantity, and the firm’s level of profit.
(b) (6 points) Show the equilibrium on a diagram, depicting the
demand curve, and MR and MC curves. On the same diagram, mark the
market price and quantity, and illustrate the firm’s...

1. Explain why fixed cost curve is horizontal, and describe how
and why "average total costs" change as production increases.
2. How do agricultural economists derive the market demand curve
for the U.S. in a product such as beef?

Question 2: Consider an industry where firms have the following
cost function: C(q) = 200 + 20*q + 0.02*q2 Consumer Demand is given
by: P(Q) = 100 – 0.02*Q
(a) Work out the equilibrium price and quantity if you are told
that the industry is a monopoly.
(b) Suppose, instead that there is free entry in this industry
and firms enter and behave as in perfect competition. How many
firms will enter the industry in the long-run?

There are 3 firms in a market with differentiated products. The
marginal cost of production for each firm is c=20. There are no
fixed costs. The system of inverse demands in this market is given
by:
P1=120-q1-0.5(q2+q3)
P2=120-q2-0.5(q1+q3)
P3=120-q3-0.5(q1+q2)
And the corresponding demand system is
q1=60-1.5P1+0.5(P2+P3)
q2=60-1.5P2+0.5(P1+P3)
q3=60-1.5P3+0.5(P1+P2)
a. Suppose the 3 firms operate independently, and choose prices
simultaneously. Find the best response function of each firm to the
prices of its two rivals.
b. Find the equilibrium prices, and...

Consider the following total cost function for an individual
firm:
C(q) = 10+ q + (1/4)q^2
The industry demand is estimated to be:
Q = 100 - P
1) Now suppose there is a monopolist facing the industry demand.
Write down the monopolist's pro t function.
2) What is the equation of the monopolists marginal revenue
function? Also, explain how the monopolist's marginal revenue
function differs from the marginal revenue function of a firm in a
long-run perfectly competitive market....

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