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ajaz_eco_204_2012_2013_chapter_16_Market_Power

However since capacity is less than the output where

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Unformatted text preview: tribute. Case B Check when/if ⏟? Check when/if This says the company should produce at capacity (which is assumed to be strictly positive). Therefore we know that To see when Case B arises we need to see when . Substitute and in the FOC: ⏟ ⏟ () Now: () () This says that if the marginal revenue at capacity is greater than or equal to 0 then the firm should produce at 100% capacity. Intuitively, this happens when capacity is less than or equal to the unconstrained solution as shown in the following example: 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 that? By checking if : 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). Now that we know what Case B is and when it’ll happen, let’s take another look at the FOC: 25 ECO 204 Chapter 16: Analysis o...
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