Econ 200 Practice Final Solution

# Econ 200 Practice Final Solution - Suggested Answers 2004...

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Suggested Answers: 2004 Final Exam (see old problem set solutions for problems 1-3) 4. The fi rm solves the following maximization problem: max q 1 ,q 2 ( P ( q 1 ) c 1 ) q 1 + β ( P ( q 2 ) c ( q 1 )) q 2 The fi rst order conditions yield: P ( q 1 ) + P 0 ( q 1 ) q 1 c 1 βc 0 ( q 1 ) q 2 = 0 P ( q 2 ) + P 0 ( q 2 ) q 2 c ( q 1 ) = 0 While the second equations is the standard requirement that marginal rev- enue equals marginal cost, in the fi rst equation there is an extra term that captures the e ff ect of fi rst period output on second period cost. Since that term is positive, we have that marginal revenue is less than marginal cost in the fi rst period, so there will more output than if there were no learning by doing. The monopolist produces extra output to be able to produce at a lower cost in the second period. 5.a ) The downstream fi rm solves: Max Q s Q s (100 5 Q s ω ) (1) The f.o.c. is Q s : (100 10 Q s ω ) = 0 and 1 Q s = 100 ω 10 Hence, the downstream fi rm’s demand is Q ω ( ω ) = 100 ω 10 or ω = 100 10 Q ω b) The upstream fi

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