Econ_4450_Assignment - x = 25 = x(1 x(2 = 5 20 while market price is p = 3 2 By conventional wisdom this is a sick industry 3 Paradoxically there

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Econ 4450-2009  Exercise Number Two Problem II     Consider a world economy, where there are two producers of an industry ( steel ) with total  cost  functions:         C(x, 1) = F(1) + M(1) x  for producer 1 over output x  [0, Q(1)],         C(x, 2) = F(2) + M(2) x  for producer 2 over output x  [0, Q(2)], where, F(1) = 10 < 20 = F(2), fixed costs M(1) = 3 > 2 = M(2), marginal cost Q(1) = 10 < 20 = Q(2). capacity The market inverse demand function for this good is:                p =  28 – x. Show that at the equilibrium: 1. The profits of these two incumbent firms are: (1) = -10,     (2) = 0, π π and industrial output is:
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Unformatted text preview: x = 25 = x(1) + x(2) = 5 + 20, while market price is: p = 3. 2. By conventional wisdom, this is a sick industry. 3. Paradoxically, there can still be a new firm entering profitably with the total cost function: C(x, 3) = F(3) + M(3) x for producer 3 over output x ∈ [0, Q(3)], where, F(3) = 24, M(3) = 1, Q(3) = 25. 4. The above situation resembles the rise of the Japanese steel industry after World War II. Suggestion: Plot out the step-ladder shape of supply curves before and after the entry of firm 3....
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This note was uploaded on 06/25/2009 for the course ECON 4450 taught by Professor Wan during the Spring '09 term at Cornell University (Engineering School).

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Econ_4450_Assignment - x = 25 = x(1 x(2 = 5 20 while market price is p = 3 2 By conventional wisdom this is a sick industry 3 Paradoxically there

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