Supply and Demand and Marginal Revenue Curves

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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. 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...
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