Ans_Quiz5 - b) With perfect first-degree price...

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Answer to Quiz 5 Suppose that a firm faces a demand curve for its product of 10 d P Q = - . The corresponding marginal revenue curve is 10 2 MR Q = - . The firm has a constant marginal cost of $4 per unit. If the firm engages in uniform pricing, what price will the firm charge? What is the equilibrium quantity? Profit? Producer surplus? Calculate the same for the firm who practices perfect price discrimination. If price discrimination is impossible the firm will set MR MC = . 10 – 2Q = 4 Q = 3 At this quantity, price will be P = 7, total revenue will be TR = 21 and total cost Tc = 4*3= 12, and profit will be 21 – 12 = 9. Producer surplus is total revenue less non-sunk cost, or, in this case, total revenue less variable cost (profit plus fixed cost). Thus producer surplus is 9.
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Unformatted text preview: b) With perfect first-degree price discrimination the firm sets P MC = to determine the level of output. 10 - Q = 4 => Q = 6 The price charged each consumer, however, will vary. The price charged will be the consumer’s maximum willingness to pay and will correspond with the demand curve. Total revenue will be the area underneath the demand curve out to Q = 6 units, or 0.5(10 – 4)(6) + 4*6 = 42. Since the firm is producing a total of 6 units, total cost will be TC = 4*6 = 24. Profit is then 42 – 24 = 18, while producer surplus is also 18 as fixed cost is assumed to be zero. . c) By being able to employ perfect first-degree price discrimination the firm increases profit and producer surplus by 7....
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This note was uploaded on 01/30/2011 for the course 730 368 taught by Professor Bryant during the Spring '08 term at Rutgers.

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