ps1 - Department of Economics University of California,...

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Economics 121-Fall 2004 Page 1 Problem Set 1 Department of Economics Fall 2004 University of California, Berkeley Woroch/Lopez/Sydnor Economics 121 PROBLEM SET 1 Due: Tuesday, September 21, 2004, 12:30 PM (in lecture) 1. Jive Record sells Britney Spears new album In the Zone, over two periods. The aggregate demand for the album is Q(P) = 25 – P, where Q is measured in millions of CDs. This means one million people willing to pay as much as $25 for the album, while two million would pay $24, and so on down to 25 million willing to pay $1. Marginal cost of producing and distributing a CD is $5. a) What price will the record label set in the first period if it sets the monopoly price? Draw the demand, marginal revenue, marginal costs and the monopoly price and quantity for the first period. b) Given your price in part a), what is the demand the record label faces in the second period? [Hint: which type of consumers did not purchase the CD in the first period?] c) Show that the monopoly price it sets in the second period is $10. d) If consumers have zero costs to waiting, will the record label be able to charge the P = $15 in period 1? Explain. e) What would happen if the record label tried to set a price of $10 in period 1? f) Qualitatively, what do you think allows a producer of a durable good to be able to make a profit even if consumers know the producer will lower the price in the future? 2. Suppose that American beer production is a perfectly competitive industry. Market demand for these beers (in millions of barrels per year) is given by: D(p) = 221 – p where p is the price per barrel. Every brewer has the same cost function which is given by: C(q)
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This note was uploaded on 05/05/2008 for the course ECON 121 taught by Professor Woroch during the Fall '07 term at Berkeley.

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ps1 - Department of Economics University of California,...

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