ajaz_eco_204_2012_2013_chapter_16_Market_Power_PP

# Eco 204 s ajaz hussain do not distribute by constant

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Unformatted text preview: timal profits (objective) due to a small increase in marginal cost (a parameter) is: ❶ Parameterize the objective function: ( ) 15 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. By constant returns : ( ) ❷ Differentiate the parameterized objective function in ❶ with respect to the parameter : ❸ Evaluate the derivative in ❷ at the optimal solution: (c) Use Intel’s demand model from (16.7), part (c) to answer this question. Suppose Intel is a monopolist -- calculate Intel’s profit maximizing output and price. Show all calculations. Answer If Intel is a monopolist then AMD’s output is nil (i.e. ). Use this fact in: Since there is ample capacity and no minimum output constraint, Intel’s problem is: () () { } ( ⏟ ⏟ ( ) ) ( ⏟ ⏟ ) This implies: ( ) 16 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. (d) What would be the impact on Intel’s monopoly profits due to a hypothetical \$1 decrease in its marginal cost (in this question only)? Show all calculations. Answer By the envelope theorem, the impact on optimal profits (objective) due to a small increase in marginal cost (a parameter) is: ❶ Parameterize the objective function: () By constant returns : () ❷ Differentiate the parameterized objective function in ❶ with respect to the parameter : ❸ Evaluate the derivative in ❷ at the optimal solution: 17 ECO 204 Chapter 16: Practice Problems & Solutions for Analysis of Firms with Market Power in ECO 204 (this version 2012-2013)...
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## This document was uploaded on 01/19/2014.

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