Econ 400 Spring 16 Assignment 2

# Econ 400 Spring 16 Assignment 2 - Elena Antoniadou Econ 400...

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Elena Antoniadou Econ 400 – Managerial Economics Assignment 2 Due in Class on THURSDAY MARCH 3 1. Suppose that there are two goods with demand functions Q i = 1 -b i P i , i=1,2. b 1 =1 and b 2 =0.5 . There are no variable production costs but there is a common fixed cost equal to 0.72. (a) Give the equation for the consumer surplus in each market (b) Find the Ramsey prices, quantities and total consumer surplus (c) Suppose there is a regulator who sets the price equal to average production cost. For each good this depends on its share in the fixed costs of production. Let α the share of the first good. Find the regulated prices when α =0.325, α =1/3 and α =0345. How do the prices compare with Ramsey prices? What happens to consumer surplus? (d) Suppose that demand in each market comes from 10 consumers with the same individual demand functions. Can the Ramsey outcome be improved upon (minimize deadweight loss) by two two-part tariffs, one in each market, while still making sure that the firm breaks even? How about if the same two-part tariff has to be offered in both markets? (e) Suppose that the firm can profit maximize but has to use linear pricing. What price will it choose if it cannot price discriminate? What if it can exercise third degree price discrimination?

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• Spring '16
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