The following shows the demands and marginal revenue in two markets, 1 and 2, fo

Question

The following shows the demands and marginal revenue in two markets, 1 and 2, for a price discriminating firm along with total marginal revenue, MRTMRT, and marginal cost MCMC:

The graph shows two sets of demand (D1,D2D1,D2) and marginal revenue (MR1,MR2MR1,MR2) curves, with quantity on the horizontal axis, and price and cost in dollars on the vertical axis. D1D1 and MR1MR1 have vertical intercepts of $600; MR1MR1 has horizontal intercept of 60 units, and D1D1 would have horizontal intercept of 120 units (not shown). D2D2 and MR2MR2 have vertical intercepts of $400; MR2MR2 has horizontal intercept of 40 units, and D2D2 has horizontal intercept of 80 units. A total marginal revenue curve (MRTMRT) is shown, beginning at (20 units, $400, where it coincides with MR1MR1) and sloping down to end at (80 units, $100). Marginal cost MCMC is shown decreasing below 12 units of output, and increasing after 12 units of output (minimum MCMC is at (12 units, $190)); MCMC intersects MR2MR2 at about (21 units, $195); D2D2 at about (32 units, $240); MR1MR1 at about (34 units, $255); MRTMRT at about (40 units, $300); and D1D1 at about (47 units, $370).

For reference, P1=600–5Q and P2=400–5Q

Compare the demand conditions in each market; i.e. how do the two markets differ in their demand for the firm’s product?

Select one:
a. Market 1 has less demand than market 2. 1 is low demanders, 2 is high demanders.
b. Market 1 has more demand than market 2. 1 is high demanders, 2 is low demanders.
c. Both markets have equivalent demand since MCMC is constant in both markets.

Question 2

Answer saved
Marked out of 1.00
Flag question

Question text

How much total output should the firm produce (for both markets combined)?

Select one:
a. 40 units
b. 80 units
c. 60 units
d. 46 units

Question 3

Answer saved
Marked out of 1.00
Flag question

Question text

How should that output be allocated between markets 1 and 2?

Select one:
a. 40 units in both markets
b. 47 units in market 1; 32 units in market 2
c. 34 units in market 1; 21 units in market 2
d. 30 units in market 1; 10 units in market 2

Question 4

Answer saved
Marked out of 1.00
Flag question

Question text

What price should the firm charge in each market?

Select one:
a. $255 in market 1; $195 in market 2
b. $450 in market 1; $350 in market 2
c. $600 in market 1; $400 in market 2
d. $370 in market 1; $240 in market 2

a

Explanation / Answer

Question1

Compare the demand conditions in each market; i.e. how do the two markets differ in their demand for the firm’s product?

a. Market 1 has less demand than market 2. 1 is low demanders, 2 is high demanders.

As we can see that both the demand curves are parallel to each other and the 1st market have higher intercept, => 1st market has higher demand compared to 2nd market.

Question 2

How much total output should the firm produce (for both markets combined)?

a. 40 units
Here the decision will determined by MRT=MC.

Question 3

How should that output be allocated between markets 1 and 2?

d. 30 units in market 1; 10 units in market 2

Here at the optimum MR1=MR2=MRT=MC, so at the optimum, that is at MRT=MC, Q=40 and MRT=300. So, at MRT=MR1=300, Q1=30 and by MRT=MR2=300, we get Q2=10.

Question 4

What price should the firm charge in each market?

b. $450 in market 1; $350 in market 2
So, we got the optimum output combination, so at “Q1=30, P1=450” and at “Q2=10, P2=350”, form the demand curve.

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects