Solve the following question 1. Consider an example of the Baumol Model concerning the separation of ownership and control in theorganisation of the firm. The firm in question is an oligopoly. The manager seeks to maximise totalrevenue (TR) from sales, under the profit constraint imposed by the external owners, G = 500. The firmfaces an inverse demand function of the following form: p = 100-2q, and the total cost function c(q) =20q.a) What is the optimal choice of output by the manager? Does it satisfy the profit constraint?b) If the profit constraint is changed to G =$800, what happens to the manager's choice?c)Now, the external owners further change the profit constraint to G= $1000. If the manager in facthas control over the cost function, what cost level should be achieved for satisfying the new profitconstraint?d) What else can the manger do in the face of the new profit constraint?

The Baumol Model, named after economist William Baumol, is an economic model that focuses on the…

1. Consider an example of the Baumol Model concerning the separation of ownership and control in the organisation of the firm. The firm in question is an oligopoly. The manager seeks to maximise total revenue (TR) from sales, under the profit constraint imposed by the external owners, G = 500. The firm faces an inverse demand function of the following form: p = 100-2q, and the total cost function c(q) = 20g. a) What is the optimal choice of output by the manager? Does it satisfy the profit constraint? b) If the profit constraint is changed to G =$800, what happens to the manager's choice? c) Now, the external owners further change the profit constraint to = $1000. If the manager in fact has control over the cost function, what cost level should be achieved for satisfying the new profit constraint? d) What else can the manger do in the face of the new profit constraint?

1. Consider an example of the Baumol Model concerning the separation of ownership and control in the organisation of the firm. The firm in question is an oligopoly. The manager seeks to maximise total revenue (TR) from sales, under the profit constraint imposed by the external owners, G = 500. The firm faces an inverse demand function of the following form: p = 100-2q, and the total cost function c(q) = 20g. a) What is the optimal choice of output by the manager? Does it satisfy the profit constraint? b) If the profit constraint is changed to G =$800, what happens to the manager's choice? c) Now, the external owners further change the profit constraint to = $1000. If the manager in fact has control over the cost function, what cost level should be achieved for satisfying the new profit constraint? d) What else can the manger do in the face of the new profit constraint?

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)

14th Edition

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Chapter12: Price And Output Determination: Oligopoly

Section: Chapter Questions

Problem 2E

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