BML 200 MICROECONOMICS CAT

SEP – DEC 2021 SEM

a) A firm that supplies a product in a perfectly competitive market has the

following cost function: TC=150−40 Q2+ Q3

Determine the function for:

i. Marginal cost

MC(Q)=C′(Q)
=-80Q+3Q2
ii. Average cost

VC(Q)
Therefore= -40Q2+Q3
iii. Fixed cost

AFC(Q) = FC/Q 
150/Q
iv. Variable cost (4 Marks)

AFC(Q) = FC/Q 
=40Q + Q2
 b) For each of the functions determined in Question 2(c) above determine the value

for each function at an output level of 150 units. (4 Marks)

Marginal cost

MC(Q)=C′(Q)
=-80Q+3Q2
Q=150
=67100
Average cost

VC(Q)
Therefore= -40Q2+Q3
=2475500
Fixed cost

AFC(Q) = FC/Q 
150/Q
= 150/150=0

a) The demand for spring water is given by P=1000−Q T where Q T is the total amount

of the product sold. The marginal cost is zero. The firms in the market behave like

Cournot oligopolist.

i. If there are two firms, determine the reaction functions for each firm? (4 Marks)

Marginal revenue equations are:

MR1 = TR(Q1)' =((1000 - Q1 - Q2)×Q1)' = 1000 - 2Q1 - Q2.
MR2 = 1000 - 2Q2 - Q1.
Reaction functions for each firm are:
MR = MC,
1000 - 2Q1 - Q2 = 0,
Q1 = 500 - 0.5Q2,
Q2 = 500 - 0.5Q1.

ii. Calculate the equilibrium price and equilibrium total output. (3 Marks)

What will be equilibrium price and quantity and total output for industry are:
Q1 = 500 - 0.5×(500 - 0.5Q1),
0.75Q1 = 250,
Q1 = 333.33 units = Q2.
QT = Q1 + Q2 = 667 units.
P = 1000 - 667 = 333.