ajaz_eco_204_2012_2013_chapter_16_Market_Power_PP

Hugo also estimated amd and intels average variable

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Unformatted text preview: essing Units): The subscripts and refer to “AMD” and “Intel” respectively where ( ) and Notice these demand models are of the form ( CPU and quantity of CPUs (millions). ) respectively. Hugo also estimated AMD and Intel’s average variable cost: Throughout this final exam assume that AMD and Intel: ● are in the short run ● have ample capacity ● and will always produce strictly positive output (i.e. ). (a) What kind of “returns” to variable inputs do AMD and Intel have? Give a brief explanation. Answer From above we have: Both companies have constant returns as they have constant average variable costs. This implies that: 9 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. [Optional] Why does constant returns imply that average variable cost is constant? First, note that doubling all variable inputs doubles total variable cost. Next, constant returns means that doubling all variable inputs doubles output. Thus, doubling variable inputs means: (b) Suppose AMD and Intel each have the following type of production function: Here ● output ● materials ● “technology & management” parameter ● are parameters. fixed labor ● fixed capital ● variable What is the numerical value of AMD’s parameter ? What is the numerical value of Intel’s parameter ? Hint: Both companies have the same value of . Show all calculations. Answer Both companies have constant returns which means that the function is linear in output: () Notice that “materials” is the only variable input so that for either company: () What is ? From the production function: [ [ This implies that: () The only way that the function can be linear is if ⏟ [ . Thus, both companies have the same parameter . 10 ECO 204 Chapter 16: Practice Problems & Solutions for Analysis of Firms with Market Powe...
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This document was uploaded on 01/19/2014.

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