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lec101a

# lec101a - Midterm Information Please bring bluebooks and...

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1 1 Midterm Information Midterm Information Please bring bluebooks and calculators. No notes will be allowed for the exam. Exam runs from 3:30 to 4:45 p.m. Exam will be 4 questions (each question will have 3 or 4 parts) Please sit in every other chair. Two rooms for exam. - Please go to LaKretz 110 if your last name starts with A-K - Please go to Haines 39 (the lecture room) if your last name starts with L-Z - We may need to seat a few students in adjacent chairs in front row or on aisles Lots of office hours on Wednesday and Thursday—see schedule on class webpage 2 Possible Questions Possible Questions Monopoly - One firm sells in one market - Incentives—owner versus manager - Price discrimination in separate markets Transportation cost Capacity constraint - Monopoly producing a multiple plants - Perfect price discrimination and two-part tariff Imperfect competition and oligopoly - Price leadership and dominant firm - Cournot and Stackelberg model - Monopolistic competition - Spacial differentiation - Contestable markets Game theory - Dominant strategy, Nash equilibrium, Prisoner’s dilemma, sequential games - Pure and mixed strategies - Bertrand model, first mover advantage

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2 3 #1 Two Two- Part Tariff Part Tariff Ace Gym is a new health club in Brooklyn, Iowa. The club has monopoly power in the local area and deals with two types of consumers. - The individual demand for a local woman is q w =200-40P, where q w is the number of workouts per year and P is the price per workout. - Similarly, the individual demand for a local man is q m =168-40P. The local population consists of 100 men and 100 women. Assume that the gym costs associated with each workout are \$2. Ace charges an annual membership fee for joining the club and an additional charge (usage fee) for each workout. 4 #1 continued continued a) Suppose that the gym is initially a "women's only" club. What membership and usage fee would maximize profits? The firm should set usage fee at marginal cost and set membership at the consumer surplus for women, since this is the maximum benefit that women receive from the gym P=2, T=(5-2)[200-40(2)]0.5=180 P Q D w 200 AC=MC=P 5 2 Q w T
3 5 #1 continued continued b) After a discrimination lawsuit, the state orders Ace to provide service to men and women at comparable (i.e., equal) prices. What membership and usage fees would the firm charge in this case? The entry fee must now be set at the consumer surplus of the smaller demanders (men) The firm balances gains from higher P against fact that consumer surplus is reduced by higher P P Q D w D m 200 4.2 168 AC=MC 5 2 Q w P Q m T 6 #1 continued continued Compute revenue from membership and usage fees T=0.5(4.2-P)Q m =0.5(4.2-P)(168-40P) =352.8-168P+20P 2 T paid by 200 members Usage profit = =100(P-2)Q m +100(P-2)Q w =100(P-2)(Q m +Q w ) =100(P-2)(168-40P+200-40P) =100(P-2)(368-80P) = 100(-80P 2 +528P-736) • π

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