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Module 7 Assignment: P = $60, Q = 4, and π = 4 ($60 - $20) = $160

The document contains a module assignment with 6 questions regarding pricing strategies for monopolies and firms with market power. For question 2, the optimal prices, outputs, and profits are calculated for different pricing strategies including single pricing, price discrimination, two-part pricing, and block pricing based on a demand and cost graph. Question 3 involves calculating profits from a second-degree price discrimination strategy based on another graph. Question 4 involves calculating optimal prices and markups under third-degree price discrimination for two consumer groups with different elasticities. The remaining questions involve determining optimal two-part pricing strategies, comparing profits to single pricing, and calculating the optimal package size and price for a bundled good.

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Reniella Alleje
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750 views

Module 7 Assignment: P = $60, Q = 4, and π = 4 ($60 - $20) = $160

The document contains a module assignment with 6 questions regarding pricing strategies for monopolies and firms with market power. For question 2, the optimal prices, outputs, and profits are calculated for different pricing strategies including single pricing, price discrimination, two-part pricing, and block pricing based on a demand and cost graph. Question 3 involves calculating profits from a second-degree price discrimination strategy based on another graph. Question 4 involves calculating optimal prices and markups under third-degree price discrimination for two consumer groups with different elasticities. The remaining questions involve determining optimal two-part pricing strategies, comparing profits to single pricing, and calculating the optimal package size and price for a bundled good.

Uploaded by

Reniella Alleje
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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GROUP 7 1A12

Bayangan, Krizzha November 24, 2021


Duqueza, Maria Andrea
Tinio, Hanne Karla

MODULE 7 ASSIGNMENT

2. Based on the following graph (which summarizes the demand, marginal revenue, and
relevant costs for your product), determine your firm’s optimal price, output, and the resulting
profits for each of the following scenarios: (LO2)
a. You charge the same unit price to all consumers.
Since MC = MR, based on the graph, Q = 4,
Thus the monopoly level equilibrium price is at $60.
P = $60, Q = 4, and π = 4($60 - $20) = $160.

b. You engage in first-degree price discrimination.


The maximum price charged on the demand curve starts at $100 to $20 for each unit (up
to Q = 8 units).
π = 8($100 - $20)(0.5) = $320.

c. You engage in two-part pricing.


A fixed fee of $320 and $20 per unit will be charged. The number of outputs is 8 units
and the total profits are $320
d. You engage in block pricing.
$320 + $160 = $480
20 x 8 = $160
P = $480 for 8 units
Q=8
π = $320.
3. You are the manager of a firm that charges customers $16 per unit for the first unit purchased
and $12 per unit for each additional unit purchased in excess of one unit. The accompanying
graph summarizes your relevant demand and cost. (LO2)
a. What is the economic term for your firm’s pricing strategy?
The firm is following second-degree price discrimination related pricing strategy

b. Determine the profits you can earn from this strategy.


Total revenue = P x Q
π = TR - TC
= ($16 + $12 x (3-1)) - AC x 3
= ($16 - $24) - $8 x 3
= $40 - 24
= $16
Thus, the profit earned by the firm from the second-degree price discrimination
related pricing strategy is $16

c. How much additional profit would you earn if you were able to perfectly price
discriminate?
Profit = consumer surplus
= ½ ($18 - $8) x (5 - 0)
= ½ x 10 x 5
= $25
Thus, the additional profit that could be earned if the firm will able to perfectly
discriminate is $9
4. You are the manager of a monopoly that sells a product to two groups of consumers in
different parts of the country. Group 1’s elasticity of demand is -3, whole group 2’s is -5. Your
marginal cost of producing the product is $40. (LO1, LO2)
a. Determine your optimal markups and prices under third-degree price discrimination.
P1 = [-3/1+3] 40
= 3/2 (40)
= 60

P2 = [-5/1-5] 40
= 5/4 (40)
= 50
Markups = 125%

b. Identify the conditions under which third-degree price discrimination enhances profits.
To maximize profits, a firm with market power produces the output at which the marginal
revenue to each group equals the marginal cost.

5. You are the manager of a monopoly. A typical consumer’s inverse demand function for your
firm's product is P = 250 − 40 Q , and your cost function is C ( Q ) = 10Q. (LO2)
a. Determine the optimal two-part pricing strategy.
P=MC
250 - 40Q = 10
240 = 40Q
6=Q
Substituting this into demand function,
P = 250 - 40Q
= 250 - 40(6)
= 250 - 240
= $10
The area of consumer surplus, that is, the fixed fee is calculated below:
FF = ½bh
= ½ * 6 * (250-10)
= $720
Thus, the per unit fee is $10 while the fixed fee is $720

b. How much additional profit do you earn using a two-part pricing strategy compared with
charging this consumer a per-unit price?
P = 250 - 40Q
TR = PQ
= (250 - 40Q)Q
= 250Q - 40Q²

MR = ⃤ TR / ⃤ Q
= 250 - 80Q
MC = 10
The optimal quantity and price is found by equating MR to MC
MR = MC
250 - 80Q = 10
240 = 80Q
3=Q
Substituting this into demand function,
P = 250 - 40Q
= 250 - 40(3)
= $130
Thus, the optimal price charged under per-unit price is $130 and optimal quantity is 3
units. The profit is calculated below:
π = 𝑇𝑅 − 𝑇𝐶
= PQ - 10Q
= 130(3) - 10(30)
= 390 - 30
= 360
Thus, the additional profits earned using a two-part pricing strategy is $360.

6. A monopoly is considering selling several units of a homogenous product as a single


𝑑
package. A typical consumer’s demand for the product is 𝑄 = 80 − 0. 5𝑃, and the marginal
cost of production is $100. (LO2)
a. Determine the optimal number of units to put in a package.
Efficient quantity is sold at P = MC
Q= 80 - 0.5P
0.5P = 80 - Q
P = 160 - 2Q
100 = 160 - 2Q
Q = 30
Thus, the optimal number of units to put in a package is 30

b. How much should the firm charge for this package?


Value to consumers
0.5 * 160-100 * 30 + 100 * 30
= 3,900
The firm should charge $3,900.

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