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Answered: - A firm is a monopoly in the output market and perfectly


A firm is a monopoly in the output market and perfectly competitive in the capital market. ?The firm faces the market demand curve P(Q) for its output, where P?(Q) < 0. ?The production function Q(K) is assumed to be strictly increasing and strictly concave.

Derive the first-order condition for the profit-maximizing amount of capital. Check that the second-order condition holds. Hint: note that the market demand curve can be written in the form P(Q(K)).

How does the monopoly?s demand curve for capital compare to the demand for capital in a competitive market? ?Illustrate on a graph. Hint: keep in mind the relationship between P and MR in a monopoly.

 


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