05 Jun Question BU 5210 Final Spring 2013 Economic Analysis @ Waterville Dr. Jang
Question
BU 5210 Final Spring 2013
Economic Analysis @ Waterville Dr. Jang
Final Examination
(Cumulative up to Ch. 9)
1. Suppose there are two firms with one demand function. This same (common) demand function is: [from HW]
Q = 1,000 – 40P with MR = 25 – 0.05Q
However, each firm has its own cost function which is different. These two different cost functions are shown below respectively:
Firm 1: 4,000 + 5Q
Firm 2: 3,000 + 7Q
What price should each firm charge if it wants to maximize its profit (or minimize its loss)?
If price war breaks out, most likely price will fall. Two most likely prices in that event are $13 and $12. Which company, firm 1 and firm 2, is more vulnerable to price war when P = $13 and why?
Which company, firm 1 or firm 2 is more vulnerable to price war when P = $12 and why?
In view of your answers in (b) and (c), discuss advantage and disadvantage of cost structure between firm 1 and firm 2. Hint: Consider FC and Contribution margin.
Long run average cost curve decreases when output elasticity is greater than one.
What is the implication of your answer in (b) and (c) for the shape of long run average cost curve? Hint: Read about LRAC curves Fig 7.9, 7.10, and 7.11
2. A firm in an oligopolistic industry has identified two sets of demand curve. If the firm is the only one that changes price (i.e., other firms do not follow), its demand curve takes the form: Q = 82 – 8P (1) with MR = 10.25 – 0.25Q. However, if it is expected that competitors will follow the price action of the firm, the demand curve is of the form: Q = 44 – 3P (2) with MR = 14.66 – 0.66Q [from HW]
a. Calculate the range of marginal revenues on the vertical portion of the MR curves at the level of output where a kink takes place. Identify the level of output where there is a kink in the demand curves. Call this portion of demand curves as “reverse L
shaped portion” of the kink demand curves.
b. Identify the other portion of the reverse L shaped kink demand curves (call it “L shaped portion” of the kink demand curves). Discuss the difference in the implications behind this “L shaped portion” and “reverse L shape portion” of the kinked demand curves. Explain which one is considered to be “optimistic” and which one, “pessimistic,” and why?
c. Find the price at the kink each oligopolist would charge at the kink. .
d. Suppose that there are two firms within this range under this oligopoly: one with higher MC (VC) but lower fixed cost and other with lower MC but higher fixed cost. But both MC’s are within the range of marginal revenue on the vertical portion of the MR. Would they charge the same or different prices at the kink given this new information? Why or why not?
e. What would happen to the price and the quantity implied above in the kinked demand curves if production cost for the whole industry increases due to a tighter environmental restriction?
f. How would your answer in (e) change if the cost increase, which still falls within the vertical range of MR curves, was only for one oligopolistic firm in the industry?
g. What does this kink demand curve example try to teach us in view of the various
points discussed so far in this question?
3. White Mountain Ski Resort has the following demand equations for its customers.
[Relating the final to Module I on D/S and Elasticity]
The demand equation for the resort as a whole:
Q = 1,000 -30P (P = 33.33 – 0.033Q with MR = 33.33 – 0.067Q)
The demand equation for Out of Town Skiers:
Qo = 500 – 10P (P = 50 – 0.1Q with MR = 50 – 0.2Q)
The demand equation for Local Skiers:
Ql = 500 – 20P (P = 25 – 0.05Q with MR = 25 – 0.1Q)
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