1 Two firms, M and N operate in two different differentiated goods markets. The total cost functions corresponding to each firm are given below: - Firm M: C = 4Q - Firm N: C = 10 + 4Q You are also told that each of the two firms have maximum production capacity of 40,000 (max quantity) which is produced in batches of 4,000. a) Use relevant plots of the Cost functions for the two firms above to explain the relationship between each firm's marginal cost curve and the zero-profit isoprofit curve. [10 marks] b) Now use the plots from part a) along with plots of isoprofit curves of values Rs. 36,000 and Rs. 64,000 for the two firms to identify any differences in the shapes of the isoprofit curves for the two firms? Also provide brief reasoning for any differences you observe. [5 marks] c) Given the information provided on firms M and N, assess whether isoprofit curves further away from the origin would always get closer to the average cost curve upon producing more units of output? Provide reasoning to support why or why not. [5 marks] Question 2: [20 marks] Q2 As discussed in Units 7, elasticity of a demand curve is given by the formula: . We also learned that the slope of the iso-profit curve is given by: , where P denotes the price of the normal good, Q denotes the quantity demanded, MC is the marginal cost of producing the good, and determines the demand elasticity of good. Use this information to answer below: a) Draw an iso-profit curve, to show via a contrast, and explain the relationship between elasticity of demand and markup that monopolist charges (Hint: Recall that the equilibrium is the point of tangency between the demand curve and iso-profit curve) [Marks = 10] b) How and why does the deadweight loss change with the elasticity of the product? Illustrate your answer with appropriate well-labelled figures. [Marks = 10] Question 3: [5 marks] Q3 In the scenario wherein a worker is paid a high salary because of his high Econometrics skills and the economy currently lacks people with the same level of skills, what would happen to the economic rents