Problem 11

Problem 11-04 (Algo)
You are the manager of a monopoly that sells a product to two groups of consumers in different
parts of the country. Group 1s elasticity of demand is -3, while group 2s is -4. Your marginal
cost of producing the product is $20.
a. Determine your optimal markups and prices under third-degree price discrimination.
Instruction: Round your answers to two decimal places.
Markup for group 1:
20%
Price for group 1: $

60
Markup for group 2:

10%
Price for group 2: $

50
b. Which of the following are necessary conditions for third-degree price discrimination to
enhance profits.
Instructions: You may select more than one answer. Click the box with a check mark for the
correct answers and click twice to empty the box for the wrong answers. You must click to select
or deselect each option in order to receive full credit.
At least one group has elasticity of demand less than one in absolute value.
There are two different groups with different (and identifiable) elasticities of demand.
We are able to prevent resale between the groups.
At least one group has elasticity of demand greater than 1 in absolute value.
A monopoly is considering selling several units of a homogeneous product as a single package. A

typical consumers demand for the product is Qd = 130 - 0.5P, and the marginal cost of
production is $180.
a. Determine the optimal number of units to put in a package.
units
b. How much should the firm charge for this package?
$
You are the owner of a local Honda dealership. Unlike other dealerships in the area, you take
pride in your No Haggle sales policy. Last year, your dealership earned record profits of $1.4
million. In your market, you compete against two other dealers, and the market-level price
elasticity of demand for midsized Honda automobiles is -1.6. In each of the last five years, your
dealership has sold more midsized automobiles than any other Honda dealership in the nation.
This entitled your dealership to an additional 40 percent off the manufacturers suggested retail
price (MSRP) in each year. Taking this into account, your marginal cost of a midsized
automobile is $13,000.
What price should you charge for a midsized automobile if you expect to maintain your record
sales?
Instruction: Round your answer to two decimal places.
$

Suppose the European Union (EU) is investigating a proposed merger between two of the largest
distillers of premium Scotch liquor. Based on some economists definition of the relevant market,
the two firms proposing to merge enjoyed a combined market share of about two-thirds, while
another firm essentially controlled the remaining share of the market. Additionally, suppose that
the (wholesale) market elasticity of demand for Scotch liquor is -1.4 and that it costs $14.80 to
produce and distribute each liter of Scotch.
Based only on these data, provide quantitative estimates of the likely pre- and postmerger prices
in the wholesale market for premium Scotch liquor.
Instruction: Do not round intermediate calculations. Round your final answers to the nearest
penny (two decimal places).
Pre-merger price: $
Post-merger price: $
Problem 11-20
BAA is a private company that operates some of the largest airports in the United Kingdom,
including Heathrow and Gatwick. Suppose that BAA recently commissioned your consulting
team to prepare a report on traffic congestion at Heathrow. Your report indicates that Heathrow is
more likely to experience significant congestion between July and September than any other time
of the year.
Based on your estimates, demand is Q1d = 600 0.25P, where Q1d is quantity demanded for
runway time slots between July and September. Demand during the remaining nine months of
the year is Q2d = 220 0.1P, where Q2d is quantity demanded for runway time slots.
The additional cost BAA incurs each time one of the 80 different airlines utilizes the runway is
1,100 provided 80 or fewer airplanes use the runway on a given day. When more than 80
airplanes use Heathrows runways, the additional cost incurred by BAA is 6 billion (the cost of
building an additional runway and terminal). BAA currently charges airlines a uniform fee of
1,712.50 each time the runway is utilized.
As a consultant to BAA, what pricing plan would clearly enhance Heathrows profitability?
What price should BAA charge for runway slots between July and September?
What price should BAA charge for runway slots for the remaining nine months?

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Problem 11-04 (Algo)

Price for group 1: $

Markup for group 2:

Price for group 2: $

A monopoly is considering selling several units of a homogeneous product as a single package. A

Problem 11-21 (Algo)

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