ajaz_eco_204_2012_2013_chapter_17__18_PP

Eco 204 s ajaz hussain do not distribute d assuming

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Unformatted text preview: w. in Division 1 and target output in Division 2. Answer For division 1: Thus: For division 2: ( ) (c) What are Division 1 and 2’s cost functions? Show all calculations below. Answer For division 1: () () ( )( ) () For division 2: () () ( )( ) () 25 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. (d) Assuming Division 1’s demand function is and Division 2’s demand function is . What are the optimal Division 1 and 2 outputs and prices if there no possibility of arbitrage between the two division’s markets? Show all calculations below. Answer The firm’s profit maximization problem (PMP) is: () ( ( ) ( () ) ) ( ) ( ) ( ) At the optimum: Thus: ( ) Thus: 26 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. (e) Assume Division 1’s demand function is and Division 2’s demand function is . What are the optimal Division 1 and 2 outputs and prices if there is a possibility of arbitrage between the two division’s markets and the cost of arbitrage is $500? Show all calculations below. Answer The firm’s profit maximization problem (PMP) is: () ( ( ) ( () ) ( ) ) ( ) ( ( ) ) ( ) Form the Lagrangian: [ The FOCs are: ( ) The first two FOCs become: Or: 27 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. Equating these two equations: Solve this simultaneously with: ( ) That is, solve: Multiplying 2nd equation by 10: Adding the two equations: Substitute in: ( ) 28 ECO 204 Chapter 17 & 18: Practice Problems & Solutions for Firms with Market Power: Business Apps and Price Discriminati...
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This document was uploaded on 01/19/2014.

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