ajaz_eco_204_2012_2013_chapter_12_Long_Run_CMP_PP

E always smaller than 1 h does abcs technology have

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Unformatted text preview: elasticity. First: () () By definition: () () () () () () () () () () Therefore: () Observe this is inelastic (i.e. always smaller than 1). (h) Does ABC’s technology have economies of scope? Should it merge with another bus company with an identical technology? Please show all calculations below. 59 ECO 204 Chapter 12: Practice Problems & Solutions for The Long Run Cost Minimization Problem in ECO 204 (this version 2012-2013) University of Toronto, Department of Economics (STG). ECO 204, S. Ajaz Hussain. Do not distribute. Answer There are economies of scope whenever: ( ) () () ) () () From above: () Note that: ( ) ( ) ( As such, there are no economies of scope and there is no advantage in merging with an identical company. (i) Assume that ABC is a rational competitive firm with a capacity of 1,000 passengers a day. Denote the price of bus tickets by . Suppose Solve the profit maximization problem: For what range of wages ( ) will ABC choose to sell no tickets, one thousand tickets, and between zero and 1,000 tickets? Show all calculations. Answer The profit maximization problem (PMP) is: Recall that all inequality constraints must be expressed in the form ( ) Having expressed all constraints in terms of ( ) . Therefore: , form the Lagrangian: () [ [ [ [ 60 ECO 204 Chapter 12: Practice Problems & Solutions for The Long Run Cost Minimization Problem in ECO 204 (this version 2012-2013) University of Toronto, Department of Economics (STG). ECO 204, S. Ajaz Hussain. Do not distribute. Since : [ [ [ [ The FOC is: The Kuhn-Tucker conditions are: [ Notice there are 4 possible cases that must be checked: q=0 λ2 = 0 (Check when λ2 ≥ 0) (Check when q ≥ 0) q = 1,000 λ1 = 0 q = 1,000 λ1 = 0 (Check when λ1 ≥ 0 ) (Check when q ≤ 1,000) (Check when λ1 ≥ 0 ) (Check when q ≤ 1,000) Case A Case B Case C Case D Case A This requires that and . This is impossible. 61 ECO 204 Chapter 12: Practice Problems & Solutions for The Long Run Cost Minimization Problem in ECO 204 (t...
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