section3_25Sept08_Exam - Inverse demand curve P s = 76 –...

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AEM 4150 section 3 25 September, 2008 Question 1 The market demand function of an oligopolistic industry composed of two firms (q1 and q2) is the following: Q = 16-2P Where Q = q1 + q2 = market output; and P = market price (a) Assume the two firms collude on setting price and output. What are P* and Q* in this case assuming that the marginal cost (MC) for both firms is 2. (b) Now assume that the firms follow the Cournot model. Given that the marginal cost for the two firms is MC1 = 4 and MC2 = 2, what is the equilibrium for the Cournot model? Question 2 Your new job is with The Economist , a weekly magazine. In the past, The Economist has charged each customer $60 dollar for a six-monthly subscription. Recently however, it has studied its customers and found that the market can be separated into two segments: 1) students and 2) non- students. You have done some analysis and generated the following demand functions: Student market
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Unformatted text preview: Inverse demand curve: P s = 76 – Q s Marginal revenue curve: MR s = 76 - 2Q s Non-student market Inverse demand curve: P n = 128 - 2Q n Marginal revenue curve: MR n = 128 - 4Q n Cost of production Assume that The Economist has the following cost function: TC = 250,000 + 20Q a) Determine the MC of The Economist . b) What would be the desired allocation of six-monthly subscriptions between the two markets, and what would be the price they should charge for student and non-student subscribers? (Assume that The Economist wishes to maximize profits.) In other words, given that they can practice price discrimination in the market, how many tickets should The Economist sell in each market, and at what price? c) If these new prices are implemented, how will prices change for students and non-students? d) How has total revenue changed for The Economist ? Assume that the total amount of six-monthly subscriptions remains unchanged....
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