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Exam 2 - Mock Solution

# Exam 2 - Mock Solution - MR = a/b 2q t b t = m t Solves to...

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ECON 425 - 100 S OLUTIONS FOR P RACTICE Q UESTIONS FOR E XAM #2 1. Do Problems 5, 6 & 7 of Chapter 10 on page 340. For Question 5, refer to the back of the book. This is a question on interrelated demand. Question 6. For a consumer t away from the monopoly, demand is given by q t = a - bp t In this question, the monopolist can price discriminate consumers according to their location. Since he is just setting a price, he will set it such that marginal revenue = marginal cost Now, what is the marginal cost of providing the good a consumer at t. MC = cost of producing + transportation cost = m + 1*t = m + t And, to find MR, q t = a - bp t therefore p t = a/b - q t /b Thus, MR = a/b - 2q t / b t Setting MR = MC yields,

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Unformatted text preview: MR = a/b - 2q t / b t = m + t Solves to give q t = b/2 ( a/b - (m+t) ) This means, the price at t would be (using the demand at t) p t = (a/b + m + t)/2 So how does price increase as t increases? dp t /dt = ½ This means for every mile a consumer is away from the firm, price increase by \$½. So who bears the freight cost? Well, the monopoly always sells at a higher price than cost, but looking at his pricing scheme, it seems that the monopolists is paying half of the transportation costs and the consumer is paying the other half. For Question 7, refer to the back of the book. This is another good practice question on bundling and mixed bundling....
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