Supply and Demand and Marginal Revenue Curves Essay

ECON2000 – Assignment #2 Answer all questions. Show all working. 1). Part A: The local zoo has hired you to assist them in setting admission prices. The zoo’s managers recognize that there are two distinct demand curves for zoo admission. One demand curve applies to those ages 12 to 64, while the other is for children and senior citizens.

The two demand and marginal revenue curves are: PA = 9. 6 – 0. 08QA MRA = 9. 6 – 0. 16QA PCS = 4 – 0. 05QCS MRCS = 4 – 0. 10QCS where PA = adult price, PCS = children’s/senior citizen’s price, QA = daily quantity of adults, and QCS = daily quantity of children and senior citizens.

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Crowding is not a problem at the zoo, so that the managers consider marginal cost to be zero. If the zoo decides to price discriminate, what should the price and quantity be in each market? Calculate the firm’s total revenue in each sub-market. (5 marks) 2). Suppose that two identical firms, Firm 1 and Firm 2, produce widgets and that they are the only firms in the market.

Their total costs are given by Ci = 30Qi, which means MC1 = 30; MC2 = 30. The two firms choose their output levels simultaneously, and market demand is given by P = 150 – Q, where Q = Q1 + Q2.

The marginal revenue schedules for each firm are as follows: MR1 = 150 – 2Q1 – Q2 MR2 = 150 – 2Q2 – Q1 a)Determine each firm’s reaction function and find the Cournot-Nash equilibrium. Determine the output, price and profit of producing widgets for each firm. (5 marks) b)Suppose that the two firms collude and form a cartel. What will be the resulting output, price and profit for each firm? [Hint: market marginal revenue is 150 – 2Q, because total revenue = P*Q = (150-Q)*Q] (5 marks) 3). Suppose that the airline industry consisted of only two firms: Caribbean and Texas Air Corp.

Let the two firms have identical cost functions, C(Q) = 40Q; MC = 40. Assume the demand curve for the industry is given by P = 100 – Q and that each firm expects the other to behave as a Cournot competitor. The marginal revenue schedules for each firm are as follows: MRA = 100 – 2QA – QT MRT = 100 – 2QT – QA a)Calculate the Cournot-Nash equilibrium for each firm, assuming that the each firm choose the output level that maximizes profits taking its rival’s output as given. What are the profits for each firm? (5 marks) )Suppose that Texas Air’s costs dropped to AC = MC = 25, and Caribbean’s costs remained at AC = MC = 40. Work out the equilibrium quantity, price and profit for each firm. (5 marks) 4). Which of the following describes an externality and which does not? Explain your answer. a)A policy of restricted coffee exports in Brazil causes the US price of coffee to rise – an increase which in turn also causes the price of tea to rise: (2 marks) b)An advertising blimp distracts a motorist who then hits a telephone pole: (2 marks) c)Planting flowers in your front garden: (1 marks) TOTAL 30 Marks

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