Lec2-Questions-Ch3-Ch4 - C What is the range in which the...

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C41 - WEEK #2 (Ch3 & Ch4) – Recommended Problems Review the list of important concepts listed at the end of the lecture slides to make sure you recall what these things mean and how to compute them. - Own price elasticity of demand - Cross price elasticity of demand - Residual demand curve - Consumer surplus, producer surplus, social welfare and deadweight loss - Textbook questions Ch3 Textbook questions Ch4 Q1. A firm’s mark-up is defined by the ratio of the price they charge to their marginal cost. A) Prove a firm’s mark-up is equal to the following formula + = = - ε 1 1 1 MC P up Mark . B) Do all firms use this formula? Explain why or why not.
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Unformatted text preview: C) What is the range in which the mark-up falls? D) Use words to explain what the mark-up measures. E) Could we employ this expression as a measure of market power? Explain why or why not. Q2. In class we mentioned that a firm’s marginal revenue can be written as a function of the (own) price elasticity of demand. A) Prove that + = 1 1 P MR , where = q P dP dq . B) Show that all firms do not operate on the inelastic portion of their demand curve (i.e. inelastic means 1-≥ ≥ ). C) Show that P is never set below a firm’s marginal cost. 1 | P a g e...
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