# Econ425_Exam1_Answer - Since high cost firm is not making a...

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ECON425 Exam 1 Short Answer Key 1) Multiple Choice 1c 2d 3a 4e 5a 6a 7c 8b 2) Short Questions 1. False. As we discussed in class, it is not in the dominant firm’s best interest to set its price so low that drives all competitive-fringe firms out of the market. He will always behave as a monopolist over his residual demand and maximize profits, so the final price may or may not be below the marginal cost of the other competitive firms. Only if he has a considerable cost advantage, the other competitive-fringe firms will be driven out. Graph please see slides Monopoly p12. 2. Graph ignored.

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3. similar to the question in class. MC of low firm = MC of high firm = 2 +2q, sharing the same mc and same supply curve.

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Unformatted text preview: Since high cost firm is not making a positive profict, profit of high cost firm =0, high cost firm is producing at the shut down point. AC of high cost firm = MC of high cost firm 400/q +2 + q = 2 +2q q =20 is the same to both high cost and low cost firm since they are sharing the same supply curve. So market price p = 2+2 q =2 + 2*20= \$42 Q =2520-10p =2520- 10 *42 =2100 So total low cost firm is producing 100 *20 =2000 The rest of the market is met by high cost firm : 2100 – 2000 = 100 , Each high cost firm is producing 20, so we have total 100/20 =5 high cost firms. N = 5 Bonus question: You will get partial credit by stating the correct understanding....
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## This note was uploaded on 05/01/2011 for the course ECON 425 taught by Professor Watugala during the Spring '06 term at Texas A&M.

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Econ425_Exam1_Answer - Since high cost firm is not making a...

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