You are told the following: The first order conditions of a modified market powe
ID: 1110282 • Letter: Y
Question
You are told the following: The first order conditions of a modified market power model on which we are working is P(q) + qP'(q) - C'(q) + 2q = 0. Will the firm end up setting a higher or lower price than in the standard market power model in which the firm is facing the same inverse demand and cost functions?
Which would be an appropriate response?
(a) If you don't know what P(q) and C(q) are, I can't really help you.
(b) I can't tell you the exact price/quantity the firm will set, but I am sure the firm will increase its price over the standard model.
(c) I can't tell you the exact price/quantity the firm will set, but I am sure the firm will decrease its price over the standard model.
Explanation / Answer
As we can see in the equation that first-order condition of qP'(q) is positive that means firm facing upward sloping production function. So, I can't tell you the exact price/quantity the firm will set, but I am sure the firm will increase its price over the standard model.
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