Econ Set 2 - 1. There are two firms with the same (common)...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
1. There are two firms with the same (common) demand function: Q = 1,000 – 40P with MR = 25 – 0.05Q Each firm has a different cost function: Firm 1: 4,000 + 5Q Firm 2: 3,000 + 7Q a. What price should each firm charge if it wants to maximize its profit (or minimize its loss)? FIRM 1 FIRM 2 4000 + 5Q 3000 + 7Q MC = 5 MC = 7 MR = MC MR = MC 25 – 0.05Q = 5 25 – 0.05Q = 7 20 = 0.05Q 18 = 0.05Q 400 = Q 360 = Q P = 25 – .025Q P = 25 – .025Q P = 25 – .025(400) P = 25 - .025(360) P = $15 P = $16 b. If price war breaks out, most likely price will fall. Two most likely prices in that event are $13 and $12. Which company, firm 1 and firm 2, is more vulnerable to price war when P = $13 and why? Q = 1,000 – 40(13); Q = 480 TR = $13 x 480 = $6,240 FIRM 1 TC = 4000+5(480) = 6,400; 6,240 – 6,400 = LOSS OF $160 FIRM 2 TC = 3000+7(480) = 6,360; 6,240 – 6,360 = LOSS OF $120 c. Which firm is more vulnerable to price war when P = $12 and why? Q = 1,000 – 40(12); Q = 520 TR = $12 x 520 = $6,240 FIRM 1 TC = 4000+5(520) = 6,600; 6,240 – 6,600 = LOSS OF $360 FIRM 2 TC = 3000+7(520) = 6,640; 6,240 – 6,640 = LOSS OF $400 THUS FIRM 2 IS MORE VULNERABLE TO A PRICE WAR WHEN P=$12 BECAUSE THEY HAVE MORE OVERHEAD COMPARED TO FIRM 1. 1
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
d. In view of your answers in (b) and (c), discuss advantage and disadvantage of cost structure between firm 1 and firm 2. e.
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 02/03/2012 for the course ECON 101 taught by Professor 123 during the Spring '97 term at University of Kelaniya.

Page1 / 3

Econ Set 2 - 1. There are two firms with the same (common)...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online