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Unformatted text preview: alled, “Pricing Principles from an Alternative Textbook”. This homework problem is
the problem used as an example in the “Ramsey Pricing” section of the handout. You can use the handout to check
Ramsey prices use monopoly power to raise just enough revenue to cover fixed costs. Given that the firm must break
even, Ramsey prices also provide the highest possible consumer surplus by pricing the more inelastic good higher.
Set 2’s prices provide the highest consumer surplus of the 3 sets. However, this set of prices does not allow the firm to
break even. Sets 1 and 3 do allow the firm to break even and Set 1 provides greater consumer surplus. Therefore, Set 1
contains the Ramsey prices. 5. Check for cross-subsidy.
a. Calculate the average incremental cost (AIC) for good 1.
Use the AIC formula for good 1:
)] [( ) ( )] [ ( [ ( . b. Calculate the average incremental cost (AIC) for good 2.
Use the AIC formula for good 2:
)] [( ) ( )] . c. Do the Ramsey prices need to be raised to avoid cross-subsidy?
No, both Ramsey prices (
AIC for a good, there is no subsidy. ) are above the average incremental costs. When a price is greater than the...
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This note was uploaded on 08/27/2012 for the course ECON 331 taught by Professor Juliebutler during the Spring '12 term at University of Tennessee.
- Spring '12