Isi peb 2014

[urvashi]

If 250 is his optimum consumption point will always be consumed and he would not consider line be no matter the preferences?

[varnika1880]

U r absolutely right in the approach even I believe the same ....but if we consider the budget line in case 2 we conveniently assume price of housing to be 1 ....I have taken numerical values of m and housing clearly if price of housing is greater than 1 then the original bundle won't be affordable

[Dr. Strange]

I have not taken price of housing ,instead I took total amount spent on housing.So there is no need to think about numeraire good.

[varnika1880]

Alright Thnx

[knowpraveen]

Hey! Thanks a lot man.

[Dr. Strange]

Anytime.

[Akash]

5. Consider two firms: 1 and 2, with their output levels denoted by q1 and q2. Suppose both have identical and linear cost functions, C(qi) = qi. Let the market demand function be q = 10 − p, where q denotes aggregate output and p the market price.
(a) Suppose the firms simultaneously decide on their output levels. Define the equilibrium in this market. Solve for the reaction func- tions of the two fims. Using these, find the equilibrium. [10 marks]
(b) Suppose the firms still compete over quantities, but both have a capacity constraint at an output level of 2. Find these reaction functions and the equilibrium in this case. [10 marks]

Part a) is trivial and has q1=q2=3 from intersection of contact curves

In part b, the contact curves shoul be similar but truncated till 2 for each firm. Because the information about the other firm should remain same. But, these curves won't be intersecting. How do we then find the equilibrium?

Please help

[Dr. Strange]

In case 2 ,
 for firm 1,
profit(x)= (10-q1-q2)q1-q1
dx/dq1= 9-(2q1+q2)

Now we know q2 can have max of 2 same as q1
Thus dx/dq1 will remain positive no matter what
So firm has incentive to increase q1 to increase profit irrespective of q2
So he will keep q1 as highest as possible =2
same with firm 2 and price =6
Funny thing is that when there is a constraint they earn profit=10 whereas without constraint profit was 9

[Akash]

Thanks.

'Constrained is better. ' so do you advocate an overthrow of the decadent capitalist system with a glorious state planned one?

[Dr. Strange]

I advocate a Monarchy with Dr. Strange as king.