Final Assignment for Microeconomics

IIIT Delhi-Winter 2020

Instructor: Prof. Souvik Dutta

Instructions:
 The assignment is worth 40 points
 All questions are compulsory and there are 6 questions in total
 Each individual has to turn his/her own assignment. This is not a group assignment
 Please write your roll number, name and email id before submitting
 This assignment will count towards 40 percent of your grades
 The institute plagiarism policy applies for this assignment since this is a replacement
of your final exam.
 The assignment has to be turned in by 11.59 pm on 18th May 2020. No submissions
will be accepted after the deadline and the student will be awarded a zero.

Q1) The Grand Theater is a movie house in a medium-sized college town. This theater shows
unusual films and treats early-arriving moviegoers to live organ music and Bugs Bunny
cartoons. If the theater is open, the owners have to pay a fixed nightly amount of $500 for
films, ushers, and so on, regardless of how many people come to the movie. For simplicity,
assume that if the theater is closed, its costs are zero. The nightly demand for Grand Theater
movies by students is QS = 220−40PS, where QS is the number of movie tickets demanded by
students at price PS. The nightly demand for nonstudent moviegoers is QN = 140−20PN .

(a) If the Grand Theater charges a single price, PT, to everybody, then at prices between 0 and
$5.50, find the aggregate demand function for movie tickets. [1 point]

(b) What is the profit-maximizing number of tickets for the Grand Theater to sell if it charges
one price to everybody? Find the profit-maximizing price. How much profit would the Grand
make? How many tickets would be sold to student and how many to nonstudents? [3 points]

(c) Suppose that the cashier can accurately separate the students from the nonstudents at the
door by making students show their school ID cards. Students cannot resell their tickets and
nonstudents do not have access to student ID cards. Then the Grand can increase its profits by
charging students and non students different prices.

What price will be charged to students? How many student tickets will be sold? What price
will be charged to nonstudents? How many nonstudent tickets will be sold? How much profit
will the Grand Theater make? [3 points]

(d) Suppose now due to renovations, the Grand Theater can hold only 150 people and that the
manager wants to maximize profits by charging separate prices to students and to
nonstudents.
If the capacity of the theater is 150 seats, how many student tickets should the Grand sell to
maximize profits? What price is charged to the students? How many nonstudent tickets are
sold? What price is charged to nonstudents? How much profit does the Grand make under
this arrangement? [3 points]
Q2) Consider an industry with the following structure. There are 50 firms that behave in a
competitive manner and have identical cost functions given by C ( y ) = y 2 /2. There is one
monopolist that has 0 marginal cost. The demand curve for the product is given by
D ( p )=1,000−50 p

(a) What is the supply curve of one of the competitive firms? Find the total supply from the
competitive sector at price p .[2 points]

(b) Find the monopolist’s profit maximizing output. What is the monopolist's profit-
maximizing price? How much output will the competitive sector provide at this price? What
will be the total amount of output sold in this industry? [ 3 points]

Q3) The prices of inputs ( x ¿ ¿ 1 , x 2 , x 3 , x 4 )¿ are (4,1,3,2)

a) If the production function is given by f ( x 1 , x 2 ) =min { x 1 , x 2 }, what is the minimum cost of
producing one unit of output? [1 point]
b) If the production function is given by f ( x 3 , x 4 )=x 3 + x 4 what is the minimum cost of
producing one unit of output? [1 point]

c) If the production function is given by f ( x 3 , x 4 )=min ⁡{x 1+ x 2 , x 3 + x 4 } what is the minimum

cost of producing one unit of output? [1.5 points]

d) If the production function is given by f ( x 3 , x 4 )=min { x 1 + x 2 } +min ⁡{x 3 + x 4 } what is the

minimum cost of producing one unit of output? [1.5 points]

Q4. Suppose there are three firms with the following demand functions in an oligopoly
market:
q 1=16−2 p1 + p2 + p3
q 2=16+ p1−2 p2 + p3
q 3=16+ p1 + p2−2 p3
where p1 , p2 , p 3 are prices chosen by firm 1, 2 and 3 respectively while q 1 , q 2 , q 3 are the
quantities that they sell in the market. Each firm has a cost function c ( q ) =2 q.

(a) Find the prices that each firm chooses in a Bertrand equilibrium. [3 points]

(b) Find the equilibrium quantity that each firm sells and profits earned. [2 points]

Q5.) You know you have a problem if your sales trail even in developing markets. You know
you have a serious problem if your growth in volumes is barely 1% from a year ago.
That's the case with Coca-Cola India whose growth in the critical April-June quarter came
crashing down from 20% a year ago. It was the worst performance of the Indian unit of the
world's largest beverage maker in five years.
New Game Plan
The India units of Coca-Cola and PepsiCo are critical bastions of growth for their American
parents, but are now confronted with the threat of a slowdown in volumes. Executives of both
companies have been forced to recast their strategy through a combination of price cuts,
differential pricing (exactly the same product being sold at different prices to different
consumers), trade discounts, restructuring of distribution networks and stepping up capacities
at bottling plants.”
“Faced with slowdown threat, Coca Cola & PepsiCo experiment with
strategies to push volumes growth”, The Economics Times, June 2013

You have been hired by Coca Cola to devise their best differential pricing strategy.

Assume Coca Cola segments the market into two groups- Group A and B. (You can motivate
these groups by keeping in mind one of your market segmentation mentioned in a)) Assume
that consumers in Group A and B have preferences
UA(x, C) = C0.2x0.8
UB(x, C) = C0.7 x0.3

Where x: is quantity of product x and C is the quantity of 200 ml Coca Cola.

If the average income in Group A is Rs 80,000 per month and that of Group B is Rs 40,000
per month and price of x is Re 1. Assume group size of A is 100 and that of B is 50.

(For Group A: MUC = 0.2C-0.8X0.8 ; MUX = 0.8C0.2X-0.2 )

(For Group B: MUC = 0.7C-0.3X0.3 ; MUX = 0.3C0.7X-0.7 )

a. Find the aggregate demand for coca cola for group A (1.5 points)

b. Find the aggregate demand for coca cola for group B (1.5 points)

c. Find the aggregate demand for coca cola (2 points)

Assume that Coca Cola has dropped the idea of differential pricing but is mindful of the
segmented market.
“Starting this month, all Coca-Cola's beverages in 200 ml bottles will be sold at a flat Rs 10,
down from Rs 15, a top trade official told ET Magazine. “Its heavy discounting and at the
cost of profitability. The company is pushing volumes almost as if in panic," he says.”
“Faced with slowdown threat, Coca Cola & PepsiCo experiment with strategies
to push volumes growth” The Economics Times, June 2013

d. Find the arc elasticity in this range for the aggregate demand curve. (3 points)

e. How will revenue change for Coca-Cola based on your analysis? (2 points)
Q6.) Sunita has a monthly income of Rs 1000 that she allocates between two goods: apples
(A) and oranges (O).
a. Suppose apple costs Rs. 50 per kilogram and oranges costs Rs. 20 per kilogram. Write
and draw her budget constraint. (1 points)

b. Suppose also that her utility function is given by the equation U(A,O)=2A+5O. What
combination of apples and oranges should she buy to maximize her utility? (1 points)

c. Sunita’s supermarket has a special promotion. If she buys 10 kilograms of oranges (at
Rs. 20 kg), she gets the next 10 kilograms for free. This offer applies only to the first
10 kilograms she buys. All oranges in excess of the first 10 kilogram (excluding
bonus oranges) are still Rs. 20 per kg. Draw her budget constraint. (1 points)

d. An outbreak of drought raises the price of oranges to Rs.150 per kg. The price of
apples remains constant. The supermarket ends its promotion. Write and graph her
new budget constraint. What combination of apples and oranges now maximizes her
utility? (2 points)