first_and_second_ans

# first_and_second_ans - Problems on Second degree Price...

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Problems on Second degree Price Discrimination 1. Problem #5 on page 129 at end of chapter 6 (4th edition) 2. Problem #6 on page 129 at end of chapter 6 (4th edition) 3. A monopolist is doing second degree price disrcimination and there are two groups of consumers: low demand (L) and high demand (H). . Which of the following statements is/are true? (a) The low demand group may gain if the government bans price discrimination and forces the monopolist to charge only one two part tari±. (b) The low demand group will gain if the government bans price discrimination and forces the monopolist to charge only one two part tari±. (c) The high demand group may gain if the government bans price discrimination and forces the monopolist to charge only one two part tari± (d) The high demand group will gain if the government bans price discrimination and forces the monopolist to charge only one two part tari± Answer. Correct answer is (c). If the government bans price discrim- ination and the monopolist must o±er only one two part tari±, there are two possibilities: either 1) the monopolist decides to exclude the L group o±ering only one two part tari± or 2) it decides to include it. for the H group, leaving zero consumer surplus. Since this group gets Hence answer (d) is not correct. Answer (b) is also incorrect, because as the L group gets zero surplus (same as under second degree price discrimination). If the the optimal choice for the monopolist is (2) L group zero surplus but it can give the H group more surplus than what it gets under second degree price discrimination (see note at the end of this answer key.) 1

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4. (Harder) There are three groups of consumers. Prior to starting to starting to do second degree price discrimination only two groups were served. But with price discrimination all of them are served. Can you conclude that total deadweight loss decreased? Answer. No, cannot conclude that. There is an increase in total sur- plus (decrease of deadweight loss) derived from the participation of the third group. But deadweight loss could increase for those groups that were served prior to price discrimination (e.g. if total output does not increase.) If this negative e/ect is stronger than the positive e/ect from the third group, deadweight loss could increase. 5. With second degree price discrimination, the surplus of consumers in the low demand group will be higher the larger is the relative size of this group. True or False. Explain. Answer:
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## This note was uploaded on 10/15/2008 for the course ECON 171 taught by Professor Hopenhayn during the Spring '07 term at UCLA.

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first_and_second_ans - Problems on Second degree Price...

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