000Econ106PSQ2Summer07sessionA

# 000Econ106PSQ2Summer07sessionA - Economics 106P UCLA E...

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Economics 106P UCLA E. McDevitt STUDY QUESTIONS SET #2 PRICING 1. a. What conditions make price discrimination possible? b. A monopoly can sell its good in the US, where the elasticity of demand is -2, and in South Korea, where the elasticity of demand is -4. Its marginal cost is \$10. At what price does the monopoly sell its good in each country if resales are not possible? 2. A dominant firm has a market share of 50%. The market elasticity of demand ( η M ) is -2 and the elasticity of supply of the fringe firms ( ε ) is 4. The dominant firm has a marginal cost of \$2. What is the profit-maximizing price? 3. a. What is 3 rd -degree price discrimination? Under what conditions is it profitable? b.A monopolist is deciding how to allocate output between two markets. The two markets are separated geographically (East and West). The demand curves for each market are P E = 20 - Q E and P W = 30 - 2Q W The monopolist's total cost function is TC = 4 + 4Q. What are price and output in each market if the firm can price discriminate? What are total profits? Show this on graphs. 4. A monopolist faces the following two demand curves: P 1 = 100-Q 1 and P 2 = 80-Q 2 . Marginal cost is given as MC = 6 + 3Q. Fixed costs are zero. a. Assuming the conditions for 3 rd -degree price discrimination are satisified, find the profit-maximizing set of quantities and prices under third-degree price discrimination. What is profit? Graph your answers. b. Suppose the firm was constrained to charge one price to all consumers. What is the profit-maximizing quantity and price? What is profit? Graph your answers. 5. This question is on 2 nd -degree price discrimination. A quantity-discriminating monopoly faces the demand curve P = 90-Q. Marginal cost is fixed at \$30. This firm plans on a charging price P 1 for the first Q 1 units (first block), P 2 for Q 2 -Q 1 ( second block), and P 3 for Q 3 -Q 2 (third block). Q 3 is the total amount purchased. Find profit-maximizing Q 1 , Q 2 , Q 3 , P 1 ,P 2 , and P 3 . What is total profit? How does it compare to total profit for a non-discriminating monopolist? Show the above answers on a graph. 6. This question is on peak-load pricing. A movie theater faces the following demand curves: Daytime demand is P = 10-0.1Q and nighttime demand is P = 24 -0.1Q , where P = price of a ticket. The marginal cost of an additional viewer is 0, but the theater only has 100 seats. What are the profit- maximizing prices for daytime and nighttime consumers? Draw a graph of the above. 7. This question is on two-part tariffs. As the owner of the only tennis club in a small community, you must decide on membership dues and fees for court time. There are two types of players. “Serious” players have demand: Q 1 = 10 – P where Q1 is court hours per week and P is the fee per hour for each individual player. There are also “occasional” players with demand: Q 2 = 8-P.

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