A firm produces for two markets, (#1 & #2). The demand curves and total cost cur

Question

A firm produces for two markets, (#1 & #2). The demand curves and total cost curve are shown below. The schedules below are derived from these demand and cost curves. Consider the body of information and then answer the questions that follow. P:-$60 TC= 128 +69Q-14Q + Q P2 132-8Q2 TC- 128+ 690 14Q+Q Pi TR ARs MRi TC TFC TVC ATC AFC AVC MC P2 TR2 AR2 MR2 Ili 112 0 60 0 60 60 128 1 60 60 60 60 184 2 60 120 60 60 218 3 60 180 60 60 236 108 78.7 4 60 240 60 60 244 116 61.0 5 60 300 60 60 248 120 49.6 6 60 360 60 60 254 126 42.3 7 60 420 60 60 268 140 38.3 8 60 480 60 60 296 168 37.0 9 60 540 60 60 344 216 38.2 10 60 600 60 60 418 290 41.8 69 132 0 0 56 184.0 90 109.0 56 44 124 124 116 45 25 116 232 36 12 108 324 29 5 100 400 68 24 4 92 460 21 9 84 504 20 20 76 532 21 37 68 544 24 60 60 540 -12 29 89 52 52028 84 52 36 20 (1)Complete columns 7 (TFC), 10 (AFC), 15 (AR2), 17(profit in market #1), 18 (profit in market #2). (Round your numbers to one decimal point), Briefly comment on your observations about ATC, AFC & both AR1 relative to MRi and ARz relative to MR2 (2)Determine the profit maximizing output in each of the two markets (3)What price would the firm charge in market 2 if the firm produces the profit maximizing output? (4)Find the total profit earned in each of the two markets. (5)At what price will the firm in market 1 and the firm in market 2 shut down? (6)Find the price elasticity of demand at equilibrium in each of the markets.

Explanation / Answer

1. Both ATC and AFC are downward sloping. The gap between two keeps narrowing as output level increases.
AR1 = MR1 = 60 i.e. they are constant.
MR2 < AR2 for all output levels and MR2 declines at twice the speed of AR2.

2. Market 1: Profit is maximized when 7 units are produced.
Market 2: Profit is maximized when 9 units are produced.

3. The firms would charged $76 in second market.

4. Market 1: $196
Market 2: $264

5. the shutdown price in both markets will be $20 per unit. That is neither of the firms will charge a price less than $20 per unit.

6. Formula for elasticity is –

Ep = dQ/dP * P/Q

In Market 1, dQ1/dP1 = infinity and hence Ep1 = infinity (i.e. market demand is perfectly elastic)

In market 2, dQ2/dP2 = -1/8 = -0.125*76/7 = -1.36

Q P1 TR1 AR1 MR1 TC TFC TVC ATC AFC AVC MC P2 TR2 AR2 MR2 1 2 0 60 0 128 128.0 0.0 69.0 132.0 0 -128 -128 1 60 60 60 60 184 128.0 56.0 184.0 128.0 56.0 44.0 124.0 124 124 116 -124 -60 2 60 120 60 60 218 128.0 90.0 109.0 64.0 45.0 25.0 116.0 232 116 100 -98 14 3 60 180 60 60 236 128.0 108.0 78.7 42.7 36.0 12.0 108.0 324 108 84 -56 88 4 60 240 60 60 244 128.0 116.0 61.0 32.0 29.0 5.0 100.0 400 100 68 -4 156 5 60 300 60 60 248 128.0 120.0 49.6 25.6 24.0 4.0 92.0 460 92 52 52 212 6 60 360 60 60 254 128.0 126.0 42.3 21.3 21.0 9.0 84.0 504 84 36 106 250 7 60 420 60 60 268 128.0 140.0 38.3 18.3 20.0 20.0 76.0 532 76 20 152 264 8 60 480 60 60 296 128.0 168.0 37.0 16.0 21.0 37.0 68.0 544 68 4 184 248 9 60 540 60 60 344 128.0 216.0 38.2 14.2 24.0 60.0 60.0 540 60 -12 196 196 10 60 600 60 60 418 128.0 290.0 41.8 12.8 29.0 89.0 52.0 520 52 -28 182 102

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