Question

Assume that two identical firms in a purely oligopolistic industry selling a homogenous product agree to share the maket equally. The total market demand function for the commodity is Qd = 240 – 10P. The cost schedules of the firms are given in the following table:


q1 40 50 60 80 q2 50 70 100

SMC1 (Rs.) 8 10 12 16 SMC1 (Rs.) 4 6 9

SAC1 (Rs.) 13 12.3 12 13 SAC1 (Rs.) 7 6 7


Question 1: Profits for this firm will be:

a. Rs. 420

b. Rs. 130 (wrong)

c. Rs. 350

d. Rs. 450

Question 2: When q1 = 40, What will be MR1?

a. 2

b. 8 ✓

c. 5

d. 4

Question 3: When q1 = 40, what will be the profit maximising output for the first firm?

a. 30

b. 60

c. 40 ✓

d. 20

Question 4: When q1 = 50, what will be MR1?

a. 7

b. 2

c. 4 ✓

d. 3

Question 5: When q1 = 60, what will be MR1?

a. 0 ✓

b. 2

c. 4

d. 6

Question 6: When q1 = 80, what will be MR1?

a. 7

b. -4

c. 5

d. -8 ✓

✓ mark are the right answers. Please give explanation for this problem

Answer 1

Question 1: Profits for this firm will be:

P = 24 - 0.1Q,

q1 = q2 = 50, so Q = 100 units.

P = 24 - 0.1×100 = 14.

TP2 = (14 - 7)×50 = 350.

b. Rs. 130 (wrong)

c. Rs. 350 ✓

Question 2: When q1 = 40, What will be MR1?

MR = TR'(Q) = 24 - 0.2Q,

Q = 40×2 = 80, so:

MR1 = 24 - 0.2×80 = 8.

b. 8 ✓

Question 3: When q1 = 40, what will be the profit maximising output for the first firm?

In this case q1 = q2 = 40, Q = 80.

c. 40 ✓

Question 4: When q1 = 50, what will be MR1?

MR1 = 24 - 0.2×(50×2) = 4.

c. 4 ✓

Question 5: When q1 = 60, what will be MR1?

MR1 = 24 - 0.2×(60×2) = 0

a. 0 ✓

Question 6: When q1 = 80, what will be MR1?

MR1 = 24 - 0.2×(80×2) = -8.

d. -8 ✓