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Problem Set 11

# Problem Set 11 - equivalent to the area X profit = the area...

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Econ 221 Key to Practice Problem Set 11 (Chapter 15) 1. The Lizard Lounge is well known for its exotic cocktails. The diagram below shows its estimated demand for cocktails curve The owners of the Lizard Lounge are considering the following four pricing options: (i) a single price scheme where the price equals the monopoly price (ii) a single price scheme where the price equals the competitive price (iii) a two-part tariff: a monopoly price and whatever cover charge that will generate a total revenue equivalent to the area X (iv) a two-part tariff: a competitive price and whatever cover charge that will generate a total revenue equivalent to the area X + Y + Z a. Identify the size of the profit for each scheme. (i) a single price scheme where the price equals the monopoly price: profit = rectangle Y (ii) a single price scheme where the price equals the competitive price: profit = 0 (iii) a two-part tariff: a monopoly price and whatever cover charge that will generate a total revenue
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Unformatted text preview: equivalent to the area X: profit = the area X +Y (iv) a two-part tariff: a competitive price and whatever cover charge that will generate a total revenue equivalent to the area X + Y + Z : profit = area X + Y + Z Under which scheme does the Lounge earn the largest profit? Scheme iv b. Identify the area that represents consumer surplus for each scheme. (i) a single price scheme where the price equals the monopoly price: CS = triangle X (ii) a single price scheme where the price equals the competitive price: CS = area X + Y + Z (iii) a two-part tariff: a monopoly price and whatever cover charge that will generate a total revenue equivalent to the area X: CS = 0 (iv) a two-part tariff: a competitive price and whatever cover charge that will generate a total revenue equivalent to the area X + Y + Z: CS = 0 Under which scheme are the Lounge customers better off? Scheme ii c. Which pricing scheme(s) achieve the economically efficient outcome? Schemes ii and iv....
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