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    ECO 511 Assignment Questions: Marginal Cost Price

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    Sabrina Afroz Erina
    1. The firm is a price taker and must accept the market price. Its supply curve is its marginal cost curve above the level of average variable cost, as the firm will supply all output levels where price exceeds marginal cost. 2. The contract curve in an Edgeworth box indicates all allocations of goods between two parties that are Pareto efficient, meaning it is not possible to make one party better off without making the other worse off. 3. The monopolist finds it profitable to separate the markets and charge different prices. It sets output at 5 in the first market and 6 in the second, charging prices of $11 and $7 respectively. This allows total revenue

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    ECO 511 Assignment Questions: Marginal Cost Price

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    Sabrina Afroz Erina
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    1. The firm is a price taker and must accept the market price. Its supply curve is its marginal cost curve above the level of average variable cost, as the firm will supply all output levels where price exceeds marginal cost. 2. The contract curve in an Edgeworth box indicates all allocations of goods between two parties that are Pareto efficient, meaning it is not possible to make one party better off without making the other worse off. 3. The monopolist finds it profitable to separate the markets and charge different prices. It sets output at 5 in the first market and 6 in the second, charging prices of $11 and $7 respectively. This allows total revenue

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    1. The firm is a price taker and must accept the market price. Its supply curve is its marginal cost curve above the level of average variable cost, as the firm will supply all output levels where price exceeds marginal cost. 2. The contract curve in an Edgeworth box indicates all allocations of goods between two parties that are Pareto efficient, meaning it is not possible to make one party better off without making the other worse off. 3. The monopolist finds it profitable to separate the markets and charge different prices. It sets output at 5 in the first market and 6 in the second, charging prices of $11 and $7 respectively. This allows total revenue

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    65 views4 pages

    ECO 511 Assignment Questions: Marginal Cost Price

    Uploaded by

    Sabrina Afroz Erina
    1. The firm is a price taker and must accept the market price. Its supply curve is its marginal cost curve above the level of average variable cost, as the firm will supply all output levels where price exceeds marginal cost. 2. The contract curve in an Edgeworth box indicates all allocations of goods between two parties that are Pareto efficient, meaning it is not possible to make one party better off without making the other worse off. 3. The monopolist finds it profitable to separate the markets and charge different prices. It sets output at 5 in the first market and 6 in the second, charging prices of $11 and $7 respectively. This allows total revenue

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
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    ECO 511 Assignment Questions

    Instructions:
    Answer the Following Questions.
    Online Submission is also welcome.
    Submission Deadline: August 27

    1. “For a price taking firm, the MC curve above the level of AVC is the supply curve”.

    Explain

    In a perfect competition market, no firm is large enough to affect the market price.

    The individual firm is so small relative to the market, it cannot significantly

    influence the market price. The firms are price- takers. Let us consider four possible

    short run situations for the firm:

    Price Marginal cost Average total cost

    P1 E1
    D1

    P2 E2 Average variable cost


    D2
    P3 E3
    D3

    E4
    P4 D4

    Quantity
    O X4 X3 X2 X1

    Case 1: At price OP1, Equilibrium point is E1 and Output level is OX1, The firms earns

    a pure profit.
    Case 2: At Price OP2, Equilibrium point is E2 and output level is OX2. Since E2 is the

    lowest point on Average Cost curve, the firm makes zero economic profit.

    Case 3:

    At price level OP3, Equilibrium point is E3 and output level is OX3. Now AC> Price at

    this point (TC>TR) and firm suffers a loss.

    Case 4:

    If market price is OP4, equilibrium point would be E4 and output level would be OX4.

    Here price< AVC. So it’s better for the firm to shut down to minimize loss. The shut

    down condition for a firm is P=MC=AVC.

    If price is less than the minimum AVC, firm will not produce any output. For price

    equal to or greater than minimum AVC, firm will produce output. So the short run

    supply curve of a price taking firm is precisely its MC curve for all levels of output

    equal to or greater than the level of output associated with the minimum AVC.

    2. What does the contract curve indicate in an Edgeworth Box diagram? Explain the

    concept of Pareto efficiency in a general equilibrium framework.

    Edgeworth box is a graph showing all the possible allocation of goods between two

    economies, given the total availability of supply of each good. A contract curve

    shows all the allocations of goods in an Edgeworth box that are economically

    efficient.
    3. A monopolist is able to separate two markets. In one market, the demand curve can

    be expressed as Q1=14-P1. In the second market the demand is Q2=20-2P2. The

    monopolist’s MC equals 4. Find the profit maximizing output, its allocation between

    the two markets and the prices charged. What happens to profit?

    D1 (P1)= 14- P1

    D2 (P2)= 20- 2P2

    Inverse demand functions are:

    P1 (Y1) = 14- Y1

    P2 (Y2) = 10- (1/2) Y2

    TR1= 14Y1- Y12

    TR2= 10Y2- (1/2) Y22

    MR1=14-2Y1
    MR2=10-Y2

    Since MC=4, MR1 and MR2=4


    14-2Y1=4, Y1= 5, P1=11
    10-Y2=4, Y2= 6, P2= 7
    Therefore, profit maximizing outputs are 5 and 6 and prices are 11 and 7.
    Total Revenue= (5x11)+ (6x7)= 55+42= 97
    However, if there was no price discrimination,
    Then D(p)= 14-p+20-2p= 34-3p
    P(Y)= (34-Y)/3
    TR= (34-Y)Y/3 = (34Y-Y2)/3
    MR= 34/3-(2/3)Y= 4
    Or, Y=11 and P=3,
    Total Revenue= 11x3= 33
    Since cost of production is the same in both case but Revenue in price
    discrimination is higher than the no discrimination case, The profit will increase by
    (97-33)= 64 TK in discrimination.

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