301ans5 - ProfessorS.Severinov Economics301,UBC Winter2010

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Professor S. Severinov Economics 301, UBC Winter 2010 Answer Key to Problem Set 5 1. Question for review # 1, Chapter 11, p. 429 Suppose a firm can practice perfect, first-degree price discrimination. What is the lowest price it will charge, and what will its total output be? When a firm practices perfect first-degree price discrimination, each unit is sold at the reservation price of each consumer (assuming each consumer purchases one unit). Because each unit is sold at the consumer’s reservation price, marginal revenue is simply the price at which each unit is sold, and thus the demand curve is the firm’s marginal revenue curve. The profit-maximizing output is therefore where the marginal cost curve intersects the demand curve, and the price of the last unit sold will equal the marginal cost of producing that unit. 2. Question for review # 4, Chapter 11, p. 429 Give some examples of third-degree price discrimination. Can third-degree price discrimination be effective if the different groups of consumers have different levels of demand but the same price elasticities? To engage in third-degree price discrimination, the producer must separate customers into distinct market segments and prevent reselling of the product from customers in one market to customers in another market (arbitrage). While examples in this chapter stress the techniques for separating customers, there are also techniques for preventing resale. For example, airlines restrict the use of their tickets by printing the name of the passenger on the ticket. Other examples include dividing markets by age and gender, e.g., charging different prices for movie tickets to different age groups. If customers in the separate markets have the same price elasticities, then from Equation 11.2 we know that the prices are the same in all markets. While the producer can effectively separate the markets, there is no profit incentive to do so. 3. Question for review # 11, Chapter 11, p. 429 Why did MGM bundle Gone with the Wind and Getting Gertie’s Garter ? What characteristic of demands is needed for bundling to increase profits? MGM bundled Gone with the Wind and Getting Gertie’s Garter to maximize revenues and profits. Because MGM could not price discriminate by charging a different price to each customer according to the customer’s price elasticity, it chose to bundle the two films and charge theaters for showing both films. Demands must be negatively correlated for bundling to increase profits. 4. Exercise 14, Chapter 11 (p.431) You are selling two goods, 1 and 2, to a market consisting of three consumers with reservation prices as
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follows: Reservation Price ($) Consumer For 1 For 2 A 20 100 B 60 60 C 100 20 The unit cost of each product is $30. a. Compute the optimal prices and profits for (i) selling the goods separately, (ii) pure bundling, and (iii) mixed bundling.
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This note was uploaded on 01/28/2011 for the course ECON 301 taught by Professor Chapple during the Spring '08 term at The University of British Columbia.

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301ans5 - ProfessorS.Severinov Economics301,UBC Winter2010

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