30 Apr Question: Suppose that the profit of a car producing firm is given by: π± = ππ β πΆ(π) And that the cost func…
Suppose that the profit of a car producing firm is given by: π± = ππ β πΆ(π) And that the cost function is given by: πΆ(π) = 4π where π± is profits, π is the price and π is quantity produced. By setting profits equal to a constant level, π, derive an expression for the isoprofit curve of this firm which expresses π as a function of π (for a given level of profits, π).
c) Let the demand curve facing this firm be: π(π) = 100 β 3π Find the profit maximising output and price for this firm and draw a diagram to illustrate the optimum (the diagram does not need to be accurate).
d) This optimum can be characterised by the condition, MRS=MRT (marginal rate of substitution equals marginal rate of transformation). Explain intuitively why it is optimal to have MRS=MRT in this context.
e) Explain what is meant by economies and diseconomies of scale and explain whether you think the cost function given in part (b) seems realistic for a car firm. How would the isocost function change if the average cost function exhibited both economies and diseconomies of scale?
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