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(a) The following quotation appeared in a Wall Street Journal article on the battle for market share in the automobile industry in 2000 : The
(a) The following quotation appeared in a Wall Street Journal article on the battle for market share in the automobile industry in 2000 : "The huge fixed costs involved in developing vehicles and running big auto factories means auto makers feel compelled to maintain market share. Losing share long term could mean shutting down factories, or running factories at unprofitable rates." Do these statements support economic theory and show that economies of scale do not benefit a firm if the output leved is small? Explain. (7 marks) (b) A manager faces two separate markets. The estimated demand functions for the two markets are: QA=1,60080PA and QB=2,400100PB The manager decides to price-discriminate. The long-run marginal cost is estimated to be: LMC=4.5+0.005Q i. How should the manager allocate the profit-maximizing output between the two markets? ii. What prices should the manager charge in the two markets? (2 marks) (3 marks) iii. Explain using examples the benefits of price discrimination over non-price discrimination to consumers and producers? (7 marks) (c) Between oligopoly and monopoly, in your view which will benefit the society more? Explain. (6 marks)
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