ajaz_eco_204_2012_2013_chapter_16_Market_Power

in this case it makes no sense to produce the output

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Unformatted text preview: when . Substitute ⏟ and ⏟ ). To see when Case C arises we in the FOC ⏟ ⏟ (⏟) Now: (⏟) (⏟) 26 ECO 204 Chapter 16: Analysis of Firms with Market Power (this version 2012-2013) University of Toronto, Department of Economics (STG). ECO 204, S. Ajaz Hussain. Do not distribute. This says that if the marginal revenue at the minimum quantity (here zero) is less than or equal to zero then the firm should produce nothing. See the graph below for an example: Case C: when () Demand In this example, customers hate the company’s output: so much so that the maximum willingness to pay is negative (meaning the company will have to pay customers to “buy” its product!). In this case it makes no sense to produce the output. ( ⏟ ) and recalling that Let’s interpret the FOC for case C: Given that so that the FOC can be written as: ⏟ ⏟ ⏟ ⏟ ⏟ If the firm is producing the minimum output (in this case zero) then at the optimal solution “marginal revenue = , the reduction in revenues due to “excessive production” where is a negative number whenever the minimum required output is greater than the unconstrained solution (see graph above). Case D Check when/if ⏟? Check when/if 27 ECO 204 Chapter 16: Analysis of Firms with Market Power (this version 2012-2013) University of Toronto, Department of Economics (STG). ECO 204, S. Ajaz Hussain. Do not distribute. This says the company should produce an output between the minimum output and capacity. Case D occurs...
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