Midterm 2 Review and Exercises

Midterm 2 Review - Midterm 2 Review and Exercises Midterm 2 will cover the following topics Price Discrimination 1 Two problems confront a firm

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Midterm 2 Review and Exercises Midterm 2 will cover the following topics: Price Discrimination: 1. Two problems confront a firm wishing to price discriminate: identification and arbitrage. 2. Third-degree or group pricing, welfare impact measured by consumer and producer surplus. (See Exercise) 3. Non-linear price discrimination: first-degree price discrimination, two-part pricing. (See Exercise) Exercise: 1. MSU Football Ticket on the PowerPoint. 2. The example of Harry Potter Book. 3. The movie ticket price example. 4. AIDS drug price discrimination and welfare impact. 5. What is the Robinson-Patman Act of 1936? If you were the judge on the case of Utah Pie Co. vs. Continental Baking Co., how would you conclude? 6. What conditions are necessary before price discrimination is both possible and profitable? Why does price discrimination result in higher profits? The primary requirement for price discrimination is an ability to segment the market by preventing transfers among sub-markets. A second requirement for price discrimination to be worthwhile is that demand elasticities must be different in the various sub-markets. Otherwise, an optimal pricing scheme will result in equal prices in all markets. Price discrimination is profitable because it allows firms to charge higher average prices, by setting MR = MC for each customer or customer class, and thereby acquire more of what is called consumers’ surplus. 7. Coach Industries, Inc., is a leading manufacturer of recreational vehicle products. Its products include travel trailers, fifth-wheel trailers (towed behind pick-up trucks), and van campers, as well as parts and accessories. Coach offers its fifth-wheel trailers to both dealers (wholesale) and retail customers. Ernie Pantusso, Coach’s controller, estimates that each fifth-wheel trailer costs the company $10,000 in variable labor and material expenses. Demand and marginal revenue relations for fifth-wheel trailers are
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P W = $15,000 - $5Q W (Wholesale), P R = $50,000 - $20Q R (Retail), A. Assuming that the company can price discriminate between its two types of customers, calculate the profit-maximizing price, output, and profit levels. B. Calculate point price elasticity for each customer type at the activity levels identified in part A. Are the differences in these elasticity consistent with your recommended price differences in part A? Why or why not? A. With price discrimination, profits are maximized by setting MR = MC in each market, where MC = $10,000. Wholesale MR W = MC $15,000 - $10Q W = $10,000 Q W = 500 units P W = $15,000 - $5Q W = $15,000 - $5(500) = $12,500. Retail MR R = MC $50,000 - $40Q R = $10,000 Q R = 1,000 units P R = $50,000 - $20Q R = $50,000 - $20(1,000) = $30,000 The profit contribution earned by the company is: π = P W Q W + P R Q R - AVC(Q W + Q R ) = $12,500(500) + $30,000(1,000)
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- $10,000(500 + 1,000) = $21,250,000 8. First degree price discrimination: The antique car example on the PowerPoint. 9. Two part pricing: the Jazz Club example on the PowerPoint.
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This note was uploaded on 04/16/2008 for the course ECN 3630 taught by Professor Gai during the Spring '08 term at Babson College.

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Midterm 2 Review - Midterm 2 Review and Exercises Midterm 2 will cover the following topics Price Discrimination 1 Two problems confront a firm

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