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π=R R C Q Q Q Q: Practice problems on Module 3 (Markets) / Solutions to Questions 1 and 4

This document contains solutions to two practice problems on markets. Problem 1 solves for the profit-maximizing quantities in two markets (Q1=5, Q2=3) given a profit function that is a function of both Q1 and Q2. Problem 4 has two parts. Part A solves for the market price (P=41) given demand and cost functions for two firms. Part B solves for the quantities (Q1=50, Q2=24) and price (P=26) if one firm acts as a leader by considering the other's reaction function.

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130 views

π=R R C Q Q Q Q: Practice problems on Module 3 (Markets) / Solutions to Questions 1 and 4

This document contains solutions to two practice problems on markets. Problem 1 solves for the profit-maximizing quantities in two markets (Q1=5, Q2=3) given a profit function that is a function of both Q1 and Q2. Problem 4 has two parts. Part A solves for the market price (P=41) given demand and cost functions for two firms. Part B solves for the quantities (Q1=50, Q2=24) and price (P=26) if one firm acts as a leader by considering the other's reaction function.

Uploaded by

Shivam
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Practice problems on Module 3 (Markets) / Solutions to Questions 1 and 4

Q1. Let π represents total profit, R1 and R2 are the total revenues in two markets.
π=R1 + R2 −C

or, π=(12−Q1 )Q1 +(20−3 Q2) Q2−3−2(Q ¿ ¿ 1+Q 2)¿

or, π=12 Q 1−Q 21 +20 Q 2−3 Q 22−3−2Q 1 −2Q 2

or, π=10 Q1−Q21 +18 Q2−3 Q22−3

Here π is function of both Q1 and Q2. To maximise, first order conditions are
∂π
=10−2 Q 1=0 or Q1 = 5
∂Q 1

∂π
=18−6 Q 2=0 or Q2 = 3
∂Q 2

Now, putting the value of Q1 and Q2 in respective market demand function we get
P1 = 12 – 5 = 7 and P2 = 20 – 3(3) = 11
Q4.
Part A:
Given that
P = 100 – Q where Q = Q1+Q2 (1)
C1= Q1 and C2 = 2Q2

Profit of firm 1 is
π 1={100−( Q 1 +Q2 ) } Q 1−Q 1 (2)
So, reaction function of firm1 is
99 Q2
Q 1= − (3)
2 2
Similarly, for firm2 profit function is
π 2={ 100−( Q 1 +Q 2 ) } Q 2−2 Q 2 (4)
So, reaction function is
Q1
Q 2=49− (5)
2
Now substituting Eq.5 into Eq. 3 we get
Q1=20 (6)

Substituting the value of Q1 into Eq. 5 we get Q2 = 39


So, the market price is P=100 ( 20+39 )=100−59=41

Part B:
If Firm 1 acts as leader, then it will consider Firm 2’s reaction function in its profit function.
First, we find the reaction function of Firm 2.
π(Q2) = PQ2 ‒ C(Q2)
or π(Q2) = {100 ‒ (Q1 + Q2)} Q2 ‒ 2Q2
Thus, for profit maximization
∂ π ( Q2 )
=100−Q 1−2 Q 2−2=0
∂Q 2
or Q2 = 49 ‒ 0.5 Q1 (2)

Profit function of firm 1 is


π(Q1) = PQ2 ‒ C(Q1)
π(Q1) = {100 ‒ (Q1 + Q2)} Q1 ‒ Q1
Substituting the value of Q2 from the reaction function of firm 2 we get
π(Q1) = {100 ‒ (Q1 + 49 ‒ 0.5 Q1)} Q1 ‒ Q1
For profit maximization
∂ π ( Q1 )
=100−2Q 1 −49+Q 1−2=0
∂Q 1 (3)
Or Q1 = 50
Putting the value of Q1 in (1) we get (4)
Q2 = 24
From (1), (2) and (3) we get
P = 100 ‒ (50 ‒ 24)
Or P = 26

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