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Midterm paper in microeconomics - Case Study Example

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Name: Tutor: Course: Date: Case Study, Macro and Micro Economics Answer to Question 1 Given that your new upstart has finished its main idea, the production technology is therefore presented as: Y = F (K, L) = AK0.4L0.8, Where: A = technology factor K = Capital L = Labor (a) Returns to scale implies the amount of additional output that could be obtained given a proportionate change of all inputs…
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Midterm paper in microeconomics
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Download file to see previous pages This can be presented in a graph as follows: Figure 1: Graph Presenting the function, Y = F (K, L) = AK0.4L0.8 (b) In order to break even, one should hardly be worried about the production size since size is hardly the only factor that influences production. Again, fixed costs are not related directly to a firm’s level of production. Break-even involves the point at which both variable and fixed costs would be recovered, implying that production size is not a major factor to consider in this case. Answer to Question 2 This is a case of two firms that compete in a sequntial game, where each firm chooses prices as its strategic variable.Firm 1 make the choice of price p1, first, while firm 2 chooses p2 later. Each of the two firms has a marginal cost of 20. The assumption in this case is that a consumer is loacted at point x, x being the distance from firm 1, and obtains some utility after buying from either of the two firms. Such functions are as below: U1 = V – p1 – 16x U2 = V – p2 – 16 (1 - x) Given that V is a constant, which is so large that it could cover the entire market: (a) The best response for firm 2 would require that the firm looks ahead to its initial decision. It would then assume that given that it comes to that point, firm 1 will choose the optimal outcome of firm 2; in this case, the highest payoff in terms of price. Secondly, firm 2 would have to back up to its second all the way to the last decision. It would assume that firm 1 would opt for high prices (Peterson, 39). The firm would continue reasoning back in the same way until all its decisions are fixed. Such decision could be presented in a (p2; p1) space as follows: V = U2 + p2 + 16 (1 - x) V= U1 + p1 + 16x Thus, U2 + p2 + 16 (1 - x) = U1 + p1 + 16x U2 + p2 + 16 = U1 + p1 + 32x Since the two firms are competing sequentially, the market equilibrium price is the point where p1= p2 since all firms would ultimately have to lower their prices in order to attract as many customers as possible (Peterson, 39). (b) The equilibrium price is p1 =p2 =20. The profit for firm 1 is Yp1 – 20c while that of firm 2 is Yp2 – 20c, where Y is the total output and 20c is the total cost which is constant for the two firms. (c) Equilibrium price is 20. The market share for firm 1 and firm 2 are x and (1 – x) respectively. Answer to question 3 The following data was obtained from Rema Store. (1) The name of the store is Rema Grocery Store. The type of cheese in the store, the prices per kilogram and the brand of cheese including the unit size are as shown in the table above. (2) Based on the various brands, unit sizes, and price per kilogram for each brand, it is easy to propose price discrimination scheme. The price discrimination scheme could explain more about the stores and the brands of cheese sold. The best price discrimination scheme for the products is the first degree of price discrimination. In this case, the seller would sell various product brands of cheese at different prices. The scheme would require that the seller knows the reservation price for each of the brand sold. Once the seller identifies the reservation price for each brand, he or she is able to sell the different brands of cheese to the consumers at the maximum prices possible. Customers hardly consider quantities but their perception of quality is based ...Download file to see next pagesRead More
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