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Eco 204 s ajaz hussain do not distribute as long

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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 Supply 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 42 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: () () ⏟ ⏟ ⏟...
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