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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 16.3 True or false: if a firm with market power is producing the revenue maximizing output at a uniform price
then the absolute value of the price elasticity must be equal to 1 (i.e. | |
)? Give a brief explanation and use graphs
to illustrate your answer. Do NOT solve the Revenue Maximization Problem.
False. Suppose the company has a linear demand curve. Then the revenue maximizing output will be where | |
if the company has ample capacity or if the capacity is equal to the output where
: only Limited Capacity
Equal to output where Ample Capacity () () () ()
Ample However, if capacity is less than the output where
|| () then at the revenue maximizing output it must be that Limited Capacity
Less than output where () () 6
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 16.4 True or false: a firm with ample capacity and market power charging optimal 1st degree price
discrimination prices will produce the same total output as if it were charging the “perfectly competitive” uniform price?
Do NOT solve any profit maximization problems and use graphs to illustrate your answer.
True. Suppose the firm has a linear demand curve and constant returns (we’ll get the same conclusion even if the firm
has decreasing returns). If the firm is charging the optimal 1st degree price discrimination prices then recalling that under
1st degree price discrimination pricing the demand curve is also the
curve we see that the total output i...
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This document was uploaded on 01/19/2014.
- Fall '14