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

Question

1. 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 700 600 D1 MC 500 D2 MR2 300 200 MART 100 10 30 The graph shows two sets of demand (D1D2D1.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 S400; 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, S100). 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, S195); D2D2 at about (32 units, $240); MR1MR1 at about (34 units, $255); MRTMRT at about (40 units $300); and DIDI at about (47 units, $370). For reference, P1-600-5QP1-600-SQ and P2=400-5QP2=400-SQ 1. 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 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 2. How much total output should the firm produce (for both markets combined)? a. 80 units b. 46 units c. 60 units d. 40 units 3. How should that output be allocated between markets 1 and 2? a. 40 units in both markets b. 34 units in market 1; 21 units in market 2 c. 30 units in market 1; 10 d. 47 units in market 1; 32 units in market 2 units in market 2 4. What price should the firm charge in each market? a. $450 in market 1; $350 in market 2 b. S255 in market 1: $195 in market 2 c. S370 in market 1; $240 in market 2 d. S600 in market 1; $400 in market 2

Explanation / Answer

1. b) Market 1 has more demand than market 2. 1 is high demanders , 2 is low demanders.

Since the market demand curve of market 1 is greater than market 2, market 2 has lower demand than market 2.

2. The MRT curve intersects the MC curve at quantity 40. Hence the total output being produced by the firm is 40 units.

d) 40 units

3. Total production is 40 units. Drawing a horizontal line from the point of intersection of MRT and MC, the line intersects MR1 at 30 units and MR2 at 10 units.

c) 30 units in Market 1 and 10 units in Market 2.

4. The price charged for each firm is where quantity meets demand curve vertically.

a. $450 in market 1 ; $350 in market 2

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