Key_Assgn_2_2011 (1)

Key_Assgn_2_2011 (1) - Summer 11 ECON 302/1/CA Professor S...

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1 Summer ’11 ECON 302/1/CA Professor S. Ahsan Homework Assignment # 2 Due Tuesday, July 19, before class (only hard copies please). Absolutely no extension. Graphs are required where relevant. 1. (25 points) Let the demand function for M-pad computers be given by y = 30,000 – 50p . Further the MC function of the producer, the only maker of this gadget in the world, is MC(y) = 150 + (y/50) . (a) (5) Find the profit maximising solution. Illustrate the answer in a graph. (b) (10) In fact, the MC in part (a) was inclusive of a per unit tax of \$50. If the new budget proposes to reduce the tax to \$20 per unit, by how much would the price decline? Is this figure more or less than the tax? Why? (Again graph your answer.) (c) (10) Calculate the DWL in parts (a) and (b) vis-à-vis the no-tax situation, i.e., when MC = 100 + (y/50) . How much does society gain or lose due to the tax reduction from 50 to 20? 2. (45 points) Michel Delle & Associes sell Z-station music system both at home and abroad. Because of power supply differences, music systems destined for one country cannot be used in the other. The demand curves are as follows: p d = 1,200 –10y, and, p f = 2,100 – 30y. (a) (5) Graph the demand curves and the associated MR curves in two separate figures, one for each market. (b) (10) Suppose that music systems are produced at a constant marginal cost of 300. If Delle were to strive for maximum profit, what would be price and output in each market? Graph & Explain. Determine the total profit. (c) (10) Calculate the price elasticity as well as the “mark-up multiple” in each market as found in part (b), and interpret the price difference between the two markets in terms of the elasticity of demand. (d) (10) Clever amateurs abroad suddenly discover that one can actually modify the wiring (at no cost) on any of the systems enabling it to run on any power supply, and this is put on u-tube so that anyone can follow the process. Can it still practice price discrimination? What would be the aggregate demand and MR facing Delle in the new regime? Graph & explain. (e)

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Key_Assgn_2_2011 (1) - Summer 11 ECON 302/1/CA Professor S...

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