This preview shows page 1. Sign up to view the full content.
Unformatted text preview: han or equal to
marginal cost at capacity. Intuitively, this happens whenever capacity is less than or equal to the unconstrained solution
as shown in the following example for a firm with a linear demand function and constant returns: Case B: when
Point () Unconstrained
solution () Demand In this example, if the firm had ample capacity it would produce where
. However, since capacity is less than
the output where
, the firm produces at 100% capacity. How would we have known this? By checking if
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. ()
( ): as long as this is true, it must be that capacity is less than or equal to the unconstrained solution
(make sure you understand this). Let’s take another look at the FOC for Case B:
() In case B ()
⏟ ( ) which allows us to re-interpret the FOC. From the envelope theorem recall that so that the FOC for case B can be written as:
⏟ ⏟ ⏟...
View Full Document
This document was uploaded on 01/19/2014.
- Fall '14
- The Land