# mid1 - Answer Key First Midterm Examination: Econ 101...

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Answer Key First Midterm Examination: Econ 101 Richard Buddin Fall 2008 Please answer all questions. The questions are in no particular order. If you do not understand a question, you should skip it and return to it later in the exam. 1. The Cedar Falls Zoo is a small zoo that attracts visitors from the local area. The demand for zoo visits by each local family is q C =68-2P, where q C is the number of Cedar Falls visits to the zoo per year and P is the price charged for each visit. The total cost of operating the zoo per year is TC=13q. Cedar Falls has 1200 families. a) Find the two-part tariff that maximizes annual profits for the zoo, where T is the annual membership fee for the zoo and P is a usage fee for members. On a well-labeled graph, show why this solution is more profitable than charging a single price for usage and no entry fee. b) Consider an alternative pricing of setting P=0. What membership fee would maximize profits in this case? On a well-labeled graph, show whether this pricing strategy will be more profitable than that in part a. c) Now suppose that regional bus service makes the Cedar Falls zoo available to residents of nearby Brookfield Park. The demand for zoo visits from each Brookfield Park family is q B =58-2P. Brookfield Park also has 1200 families. If the zoo serves families from both towns, what membership and usage fees should they charge to maximize profits? Assume that they must charge equal membership and usage fees to all families. d) Discuss how increased access to the park affects the welfare of Cedar Falls residents. Is the typical Cedar Falls family better off before families from Brookfield Park visit the zoo (part a) or after (part c)? Why are Cedar Falls families better or worse off? Answer (October 2008): a) T=441 & P=13. A single-price monopoly charges a price higher than MC. This shrinks the size of the CS, and the reduced CS diminishes the size of profits available under a two-part tariff. It is sufficient to show this on a graph. b)

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## This note was uploaded on 12/08/2008 for the course ECON 101 taught by Professor Buddin during the Spring '08 term at UCLA.

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mid1 - Answer Key First Midterm Examination: Econ 101...

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