Question

A firm produces two goods (the quantities of the two goods are denoted, Q1 and Q2). The demand functions are Pi = 50-0.0075Q1 and P.-40-0.004Q2. Total cost is given by TC 19,800 + 20Q1 + 2002, Marginal costs are constant, so pricing at marginal costs results in a loss of the fixed costs for the firm. To eliminate this loss, prices must be raised. The regulator is considering three different possible sets of prices: Set 1: P121 and P2 23.98 Set 2: P26.25 and P2 20 Set 3: P123 and P222 . At the Ramsey prices (and thus quantities) you determ ined, check for cross-subsidy a. Calculate the average incremental cost (AIC) for good 1 b. Calculate the average incremental cost (AIC) for good 2 c. Is there any evidence of a cross-subsidy? Do the Ramsey prices need to be raised to avoid cross-subsidy?

Answer 1

Aage hoemental Cast (ic) one mote unit ot a good econonvcThe Coll>e a maxmsm upto-the, potnt hele may ginal cost (MC) To avoid lose noreash prces Ge Pan 21 and Pa= 23.98/in Set ?a- 2 6.LT and及2 2 R.=23 and 22 lJet3) let demond funcHon (DP): -TC z 19800+LO&' + 20Q22 1742.33.34 = 50-0,007 P2 23.98 and P - 4o- Total RevnTR - TR1 +TR2 F) 17723974 Scann CamScanner