ajaz_eco_204_2012_2013_chapter_16_Market_Power_PP

1st degree price discrimination uniform pricing demand

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Unformatted text preview: s where or where the demand curve intersects the curve. If the firm is charging the optimal uniform price as if it is perfectly competitive then it will produce where or where the demand curve intersects the curve. 1st Degree Price Discrimination Uniform Pricing () Demand = () () Demand () In both cases the firm produces the same total output (but charges different prices altogether). 7 ECO 204 Chapter 16: Practice Problems & Solutions for Analysis of Firms with Market Power in ECO 204 (this version 2012-2013) University of Toronto, Department of Economics (STG). ECO 204, S. Ajaz Hussain. Do not distribute. Question 16.5 Consider the following profit maximization problem: () () What can be said about the firm’s capacity if at the optimal solution to illustrate your answer. Do NOT solve the Profit Maximization Problem. ? Give a brief explanation and use graphs Answer The problem is: () () () () () () Setup the Lagrangian objective function: () [ () [ Optional: The FOC and Kuhn-Tucker conditions are: () () [ [ From the KT conditions the signs of the Lagrange multipliers are: By the envelope theorem: If it means that a small increase in capacity will have a positive impact on profits. This is only possible if the () current capacity is strictly less than the unconstrained profit maximizing output (i.e. the output where ( )) () ( ). See example below for firm with linear demand curve: or that currently 8 ECO 204 Chapter 16: Practice Problems & Solutions for Analysis of Firms with Market Power in ECO 204 (this version 2012-2013) University of Toronto, Department of Economics (STG). ECO 204, S. Ajaz Hussain. Do not distribute. Firm (Decreasing Returns) Firm (Constant Returns) () () () () () () () () Firm’s Demand () () Firm’s Demand (16.6) The economist, Hugo Salgado, estimated the following demand models for Intel and AMD PC (personal computer) “CPU chips” (Central Proc...
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