monop_het_ans

monop_het_ans - Answers to problems on Monopoly with...

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Answers to problems on Monopoly with Heterogeneous goods 1. A restaurant chain has to choose how many stores to open in a city. Assume it o/ers free delivery. Then it will open a socially excessive number of stores. True or false. Explain. Answer. No. If it chooses to do free delivery, it can charge all consumers their willingness to pay and extract all surplus. This is the same as with number of stores, i.e. the one that maximizes total surplus. 2. A monopolist can produce a low or high quality product. All consumers care the same for the low quality product but prefer the high quality one. However not all consumers care the same about the high quality product. Which of the following is±are true? (a) The monopolist may choose to sell the low quality product even when it is socially e¢ cient to sell the high quality one. (b) If the cost of production of either product is the same, the monop- olist will always choose to sell the high quality product. (c) The monopolist may choose to sell the high quality product even when it is socially e¢ cient to sell the low quality one. Answer. In this case, the monopolist can extract all consumer surplus in the low quality product but not in the high. Consequently the extra surplus (producer+consumer surplus). This implies that (a) is correct and (c) is not. Notice that also (b) is correct because if everybody values the high quality product more and the cost of production is the same, the monopolist can charge a higher price for that product and 3. True or False. Explain. Answer. False. As we have seen in the Hotelling model in class, the monopolist o/ers excess variety. 1
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4. than one that does not. True or False. Explain. Answer. False. As seen in the Hotelling model analyzed in class, by paying for distribution costs the &rm is able to achieve perfect dis- crimination and it will choose the optimal number of shops and this is less than the number of shops it sets up when it does not pay for transportation costs. 5. Consumers are better o/ when a monopolist o/ers more variety. True or False. Explain. Answer. False. This is not necessarily true, as the monopolist may be better able to extract their surplus by o/ering more variety if this partitions consumers into more homogenous groups, as in the Hotelling model. 6. Suppose that a &rm may o/er a high or a low quality good. All con- sumers are willing to pay $50 dollars more for the high quality good. The marginal cost of production is the same. Suppose its pro&t max-
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monop_het_ans - Answers to problems on Monopoly with...

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