Ans_HW_ch12 - Ch 12 12.1 12.2 12.3 12.4 12.5 12.6 12.10...

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Ch 12 # 12.1, 12.2, 12.3, 12.4, 12.5, 12.6, 12.10, 12.11, 12.12, 12.13,, 12.14 Answer to Practice Homework _ Ch 12 12.1 a) Third degree – the firm is charging a different price to different market segments, individuals and libraries. b) First degree – each consumer is paying near their maximum willingness to pay. c) Second degree – the firm is offering quantity discounts. As the number of holes played goes up, the average expenditure per hole falls. d) Third degree – the firm is charging different prices for different segments. Business customers (M-F) are being charged a higher price than those using the phone on Sunday, e.g., family calls. e) Second degree – the firm is offering a quantity discount. f) Third degree – the airline is charging different prices to different segments. Those who can purchase in advance pay one price while those who must purchase with short notice pay a different price. 12.2 a) If price discrimination is impossible the firm will set MR MC = . 20 2 2 5 Q Q Q - = = At this quantity, price will be 15 P = , total revenue will be 75 TR = , total cost will be 49 TC = , and profit will be 26 π = . Producer surplus is total revenue less non-sunk cost, or, in this case, total revenue less variable cost. Thus producer surplus is 2 75 5 50 - = . b) With perfect first-degree price discrimination the firm sets P MC = to determine the level of output. 20 2 6.67 Q Q Q - = = 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 = 6.67 units, or 0.5(20 – 13.33)(6.67) + 13.33(6.67) = 111.16. Since the firm is producing a total of 6.67 units, total cost will be 68.49 TC = . Profit is then 42.67 π = , while producer surplus is revenue less variable cost, or 2 111.16 6.67 66.67 - = . c) By being able to employ perfect first-degree price discrimination the firm increases profit and producer surplus by 16.67.
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12.3 a) With demand 20 P Q = - , 20 2 MR Q = - . A profit-maximizing firm charging a uniform price will set MR MC = . 20 2 2 5 Q Q Q - = = At this quantity, price will be 15 P = . At this price and quantity profit will be 2 15(5) ( 5 ) 50 F F π π = - + = - Therefore, the firm will earn positive profit as long as 50 F < .
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