Goolsbee1e_Solutions_Manual_Ch10 - 10 Market Power and...

Solution
Solution
1. Consider the demand for schnitzel in the diagram on the
right. Suppose that there is a single seller of schnitzel,
who acts as a single-price monopolist.
a. Indicate the profit-maximizing price and quantity.
b. List the areas of consumer and producer surplus.
c. Suppose the seller begins perfectly price discriminat-
ing. How many schnitzels will she sell?
d. What happens to areas A and B when the seller begins
perfectly price discriminating?
e. What happens to areas E and H when the seller be-
gins perfectly price discriminating?
1. a. The profit-maximizing price is P
1
and quantity Q
1
.
b. The consumer surplus is A and B . The producer surplus is C , D , F , G , and I .
c. The seller will sell Q
2
schnitzels.
d. Once the seller begins to perfectly price-discriminate, areas A and B , the original consumer surplus,
becomes part of the new producer surplus.
e. Areas E and H are no longer the deadweight loss, but become part of the producer surplus.
2. Indicate whether the following statement is true or false, and explain your answer: Because the potential profit
from perfect price discrimination is always higher than the potential profit from third-degree price discrimina-
tion (segmenting), firms that practice third-degree price discrimination must not be maximizing profit.
2. Because certain market conditions have to be in place in order for perfect price discrimination to be fea-
sible, the statement is false. A firm may still be maximizing profit if it practices third-degree price dis-
crimination simply because it cannot perfectly price-discriminate given the characteristics of the market it
finds itself in.
3. There are seven consumers, each of whom is hungry for exactly
one Butterfinger. The consumers’ maximum willingness to pay is
given in the table on the right:
a. Given that each consumer wants one and only one Butter-
finger, draw the demand curve for Butterfingers.
b. If Butterfingers are priced at $7, only one will be sold. Who
buys that Butterfinger? Label the point at $7 on the demand
curve with the name of that buyer.
c. If Butterfingers are priced at $6, a second buyer will be priced
into the market. Who is that buyer? Label the point at $6 on
the demand curve with the name of that buyer.
d. Continue to label each point on the demand curve with the
name of the buyer represented by that point.
e. Suppose that you are a monopoly seller of Butterfingers, which
you can produce at a constant marginal and average total cost
of $2. Suppose you charge every customer the same price for
Butterfingers. What price should you set to maximize your
profit? How many Butterfingers will you sell? Calculate your
profit. Calculate the consumer surplus received by the buyers.
Calculate the deadweight loss.
Quantity of
schnitzels
Price
($/schnitzel)
MC
MR D
D
E
F
G
H
I
C
A
B
P
2
P
1
Q
2
Q
1
P
3
Consumer
(age, gender)
Maximum
Willingness
to Pay
Marge (34, female) $2
Homer (38, male) 4
Lisa (6, female) 5
Maggie (2, female) 6
Ned (46, male) 1
Krusty (55, male) 3
Bart (9, male) 7
Market Power and
Pricing Strategies
10
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