The following shows the demands and marginal revenue in two markets, 1 and 2, fo
ID: 1120783 • Letter: T
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, MRT, and marginal cost MC:
The graph shows two sets of demand (D1,D2) and marginal revenue (MR1, MR2) curves, with quantity on the horizontal axis, and price and cost in dollars on the vertical axis. D1 and MR1 have vertical intercepts of $600; MR1 has horizontal intercept of 60 units, and D1 would have horizontal intercept of 120 units (not shown). D2 and MR2 have vertical intercepts of $400; MR2 has horizontal intercept of 40 units, and D2 has horizontal intercept of 80 units. A total marginal revenue curve (MRT) is shown, beginning at (20 units, $400, where it coincides with MR1) and sloping down to end at (80 units, $100). Marginal cost MC is shown decreasing below 12 units of output, and increasing after 12 units of output (minimum MC is at (12 units, $190)); MC intersects MR2 at about (21 units, $195); D2 at about (32 units, $240); MR1 at about (34 units, $255); MRT at about (40 units, $300); and D1 at about (47 units, $370).
For reference, P1=600–5QP1=600–5Q and P2=400–5QP2=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?
1. Select one:
a. Both markets have equivalent demand since MCMC is constant in both markets.
b. Market 1 has less demand than market 2. 1 is low demanders, 2 is high demanders.
c. Market 1 has more demand than market 2. 1 is high demanders, 2 is low demanders.
2. How much total output should the firm produce (for both markets combined)?
Select one:
a. 60 units
b. 80 units
c. 46 units
d. 40 units
3. How should that output be allocated between markets 1 and 2?
Select one:
a. 40 units in both markets
b. 30 units in market 1; 10 units in market 2
c. 47 units in market 1; 32 units in market 2
d. 34 units in market 1; 21 units in market 2
4. What price should the firm charge in each market?
Select one:
a. $450 in market 1; $350 in market 2
b. $370 in market 1; $240 in market 2
c. $600 in market 1; $400 in market 2
d. $255 in market 1; $195 in market 2
Explanation / Answer
1. Compare the demand conditions in each market; i.e. how do the two markets differ in their demand for the firm’s product?
c. Market 1 has more demand than market 2. 1 is high demanders, 2 is low demanders.
2. How much total output should the firm produce (for both markets combined)?
It will equate MC= MRT which happens at Q=40
d. 40 units
3. How should that output be allocated between markets 1 and 2?
The firm's production of 40 units will be divided in the market as:
b. 30 units in market 1; 10 units in market 2
4. What price should the firm charge in each market?
Putting Q1 = 30, P1 = 600–5*30 = $450
Putting Q2 = 10, P1 = 400–5*10 = $350
a. $450 in market 1; $350 in market 2