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Econ 161 Exercise Set 3

This document contains 10 questions from an economics exercise set. The questions cover topics related to monopoly pricing, price discrimination, demand curves, two-part tariffs, consumer surplus extraction, product bundling, limit pricing, and predatory pricing strategies. Students are asked to analyze pricing and output decisions for firms in different market structures and strategic situations.

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1K views2 pages

Econ 161 Exercise Set 3

This document contains 10 questions from an economics exercise set. The questions cover topics related to monopoly pricing, price discrimination, demand curves, two-part tariffs, consumer surplus extraction, product bundling, limit pricing, and predatory pricing strategies. Students are asked to analyze pricing and output decisions for firms in different market structures and strategic situations.

Uploaded by

Sofia
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Economics 161 Exercise Set 3 1st Semester 2013-2014 Due Date: September 20, 2013

1.

A monopoly with constant marginal costs of $50 can sell to three groups of potential consumers, with demands 800 0.2p, 400 p, and 700 0.4p respectively. Find the optimal price quantity combination in each market (i) if the firm is able to price-discriminate; (ii) if it is not able to price-discriminate.

2.

Each month, an airline sells 1,500 business-class tickets from London to Paris at $200 a ticket, and 6,000 economy-class tickets at $80 a ticket. Use this information to construct the demand curves of business travelers and tourists respectively, if it is given that the demand curves for both groups are linear and that the marginal cost of a ticket is constant at $50.

3.

Firms A and B both use a neighborhood copy center to make all their photocopies. Firm A makes 2,0003,000 copies a month and Firm B makes 6,00010,000. The copy center charges 10 per copy. Assuming it were profitable to do so, how could a manufacturer of copiers lease both firms a copier and charge them a two-part tariff such that it would extract all their consumer surplus?

4.

A monopoly has two types of customers and is able to charge them the same two-part tariff. It knows that Type 1s demand is bp, and Type 2s is bp, where . Derive expressions for the optimal unit price p and fixed fee T, assuming the monopoly has constant marginal costs m and that it is optimal to sell (i) to both types; (ii) only to Type 2.

5.

A restaurant has three types of customers. A third of its customers, Type A, are willing to spend $5 on an appetizer but only $2 on a dessert. Another third, Type B, are willing to spend $3.50 on an appetizer and $3.50 on a dessert. The remaining third, Type C, are willing to spend only $2 on an appetizer but $5 on a dessert. All three types are willing to spend $10 on the main course. It costs the restaurant a constant $2 to prepare an appetizer or a dessert, and $7 to prepare the main course. Which is optimal for the restaurant, to offer appetizers and desserts la carte (with separate prices on the menu), or to offer them only as a complete meal, tied in with the main course?

Answer:

6.

A retailer knows that the probability distribution of its customers valuations for products A and B is that shown in the table below, but cannot tell when particular customers enter the store what their valuation are. Customers never buy more than one unit each of products A and B. Assuming the retailer has zero costs and maximizes expected profits, is it optimal to sell both products separately or as a package?

------------------------------------------------------------------------$1 $2 $3 ---------------------------------------------$4 0.2 0.1 0 $5 0.1 0.2 0.1 $6 0 0.1 0.2 ----------------------------------------------

7.

Alpha Airlines, the only carrier currently offering flights to and from Smalltown, has got wind of plans by Beta Airlines to enter its market. In an effort to deter Beta, Alpha threatens that it will respond to Betas entry with a price war. Suppose Beta believes the threat. In what ways can it minimize its losses from such a price war other than by giving up its plans altogether? Two firms with costs C(q) 50 q 2q2 share a market in which demand is perfectly inelastic at Q 10. If Firm 1 preys on Firm 2 by lowering price to an amount x below minimum average cost, how large a loss does it incur itself compared to that inflicted on Firm 2? Is its own loss necessarily larger than that of Firm 2? Firm 1 is the incumbent in a market lasting two periods with inverse demand curve p 74 9Q. Its first-period costs are C(q) 15 20q and it faces entry in the second period by Firm 2, which has identical costs. There is an asymmetry between the firms, however, in that only Firm 1 has the option of investing $63.5 in R&D in the first period in order to reduce its second-period marginal costs to $2 per unit. Show that it is optimal for Firm 1 to make this investment even though Firm 2 enters regardless. Also show that it would not be optimal for Firm 1 to make the investment if there were no threat of entry.

8.

9.

10.

Limit pricing and predatory pricing both refer to prices set by firms below the profit maximizing one given by MR MC. How do they differ? If a monopolist faces a market demand of q 16 p, and has total costs of C(q) 40q 12q2 q3, calculate the normal (strategy-free) monopoly price, the limit price (if the potential entrant has identical costs), and a range for predatory prices.

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