Sample exam answers Essay Example | Topics and Well Written Essays - 1750 words

Sample exam answers - Essay Example If firm 1 decides to produce q111 then the prices will be set at P (q111 + q2). That is, for each quantity produced by firm 1, the price is given by the curve d1 (q2). This is (d1 (q2)) firm 1’s residual demand which gives all possible combinations of firm 1’s quantity and price for a given value of q2. MC=MR. the assumption that MC is constant is made. The MR curve is given as r1(q2) with twice the slope of d1(q2) and with the same vertical intercept. The point at MC and MR meets corresponds to quantity q1ii(q2) which is the optimum quantity for firm 1. If firm 2 favors a quantity corresponding to perfect competition, q2=qc whereby P (qc), then the quantity produced by firm 1 would be 0: q1ii(qc)=0. This is where MC=MR corresponding to d1 (qc) as shown in diagram below: Given the fact that demand is linear and the marginal cost is constant, the function q1ii (q2) is also clear. q1ii (q2) is firm 1’s reaction function. Firm 1’s reaction function is the choice taken by firm 1 given an action taken by firm 2. Cournot equilibrium is the point at which firm 1’s and firm 2’s reaction functions meet given that they have the same cost function. This is shown below: First degree price discrimination is a situation where the firm is charging a price that the consumer is willing to pay. With first degree price discrimination, the producer is able to extract the entire surplus from the consumer. With the 1st degree price discrimination, the profit is equal the sum of consumer surplus and producer surplus The monopoly firm will sell quantity Q* up to the point where the price of the last unit sold just covers the MC of production. The profit of the firm is given by the difference between the price it is charging on each unit and the average cost of producing Q* units of output. The profit is given by area PAMC. 1st degree price discrimination is most practiced by single seller offering different prices to different individuals. In this