ajaz_eco_204_2012_2013_chapter_17__18_PP

# Eco 204 s ajaz hussain do not distribute noting that

This preview shows page 1. Sign up to view the full content.

This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: ) () [ The FOC is: (()) ⏟ () ⏟ () () Simplifying: () () ⏟ () () () () ⏟ () () 8 ECO 204 Chapter 17 & 18: Practice Problems & Solutions for Firms with Market Power: Business Apps and Price Discrimination in ECO 204 (this version 2012-2013) University of Toronto, Department of Economics (STG). ECO 204, S. Ajaz Hussain. Do not distribute. Noting that () () () ( ) and ( ) we get: () Since the company has constant returns, follows: () ( ) is a constant. Therefore, we can rewrite the first order condition as () The Kuhn-Tucker conditions are: [ Notice there are 4 possible cases that must be checked: q=0 λ2 = 0 (Check when λ2 ≥ 0) (Check when q ≥ 0) q=c λ1 = 0 q=c λ1 = 0 (Check when λ1 ≥ 0 ) (Check when q ≤ c) (Check when λ1 ≥ 0 ) (Check when q ≤ c) Case A Case B Case C Case D Case A Need to check if This requires that and > 0. Thus case A is impossible. 9 ECO 204 Chapter 17 & 18: Practice Problems & Solutions for Firms with Market Power: Business Apps and Price Discrimination in ECO 204 (this version 2012-2013) University of Toronto, Department of Economics (STG). ECO 204, S. Ajaz Hussain. Do not distribute. Case B Need to check if Since the KT condition is automatically satisfied. Thus we need to check if Start with the FOC: () () Substitute and : () () Thus, for we need: () () () Case B is the solution when with . Intuitively, the incremental revenue of further production is less than (or equal) to the incremental cost, so that the company loses money by producing another unit. () Case B when () Case C Need to check if Since the KT condition is automatically satisfied. Thus we need to check if () () Substitute and : () () Thus, for we need: () 10 ECO 204 Chapter 17 & 18: Practice Problems & Solutions for Firms with Market Power: Business Apps and Price Discrimination in ECO 204 (this version 2012-2013) University of Toronto, Department of Economics (STG). ECO 204, S. Ajaz Hussain. Do not distribute. () Case C will be the solution if () : intuitively, if the marginal revenue at capacity exceeds marginal co...
View Full Document

## This document was uploaded on 01/19/2014.

Ask a homework question - tutors are online