ajaz_eco_204_2012_2013_chapter_16_Market_Power_PP

Where capital at amd suppose intels production

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Unformatted text preview: r in ECO 204 (this version 2012-2013) University of Toronto, Department of Economics (STG). ECO 204, S. Ajaz Hussain. Do not distribute. (c) Suppose AMD’s production function is: management” parameter ● labor at AMD ● parameters. where ● capital at AMD ● Suppose Intel’s production function is: management” parameter ● labor at Intel ● parameters. AMD’s output ● AMD’s “technology & materials at AMD ● are where ● Intel’s output ● Intel’s “technology & capital at Intel ● materials at Intel ● are Assume that AMD and Intel are currently: ● employing the same amount of labor (i.e. capital (i.e. ) ● have identical parameters ● face identical input prices. ) ● using the same level of True or false: AMD’s “technology and management” is superior to Intel? Show all calculations and state all assumptions. Hint: Both Intel and AMD pay the same price for materials. Answer Use the fact that both companies have constant returns and therefore . For AMD: () ⏟ [ ⏟ () () ⏟ [ [ For Intel: () ⏟ [ ⏟ () () ⏟ [ [ Use the hint that both companies pay the same price for materials. For AMD this implies: () ⏟ [ For Intel this implies: 11 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. () () ⏟ [ Combining we have: Next, use the fact that both companies ● employ the same amount of labor (i.e. (i.e. ) ● have identical parameters : ⏟ ) ● use the same level of capital ⏟ That is, AMD’s level of technology and management is 75% of Intel’s and explains why -- given same level of inputs, input prices, production function and parameters -- AMD has the higher average variable cost. 12 ECO 204 Chapter 16: Practice Problems & Solutions for Analysis of Fi...
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