Micro2Solutions

# Or economic profit tr tc 100p 1300 0 p13 use the

This preview shows page 1. Sign up to view the full content.

This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: TR – TC = 100*P- 1300 =0 P=\$13. Use the following figure to answer question 34: Price MC 200 180 170 160 140 ATC D2 110 MR2 D1 80 60 MR1 40 20 50 250 350 400 500 550 650 Quantity Q34. Assume in monopolistic competition, a profit maximising firm faces demand curve D1. Firm’s excess capacity is a) b) c) d) e) 100 250 500 0 125 Solution: e) 125 Profit is maximized where MC=MR1 Q=250. A firm’s Capacity Output is produced at the level where ATC is a minimum Excess Capacity = 375- 250 = 125. Page 21 of 33 Q = 375 ©Prep101 www.prep101.com/freestuff Suppose a firm produce Q* units of output at charges price P*. Use the following figure to answer question 35: Price MC2 MC1 P* MR2 MR1 D Q* Quantity Q35. Suppose a firm’s marginal cost curve is given by MC1. What will happen if firm’s variable cost increases? a) If marginal cost remains below MC2, the firm will continue producing Q*, but will increase its price b) If marginal cost remains below MC2, the firm will continue producing Q*, but will lower its price c) If marginal cost remains below MC2, the firm will continue producing Q* and the price will remain at P* d) The firm will decrease production and produce less than Q* e) The firm will increase production and produce more than Q* Solution: c) If marginal cost remains below MC2, the firm will continue producing Q* and the price will remain at P* According to the kinked demand curve theory of oligopoly, small cost changes leave the price and quantity unchanged. Only if...
View Full Document

## This note was uploaded on 08/26/2010 for the course ECON 208 taught by Professor Dickenson during the Fall '07 term at McGill.

Ask a homework question - tutors are online