ajaz_eco_204_2012_2013_chapter_17__18_PP

# 45 eco 204 chapter 17 18 practice problems solutions

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Unformatted text preview: ith Market Power: Business Apps and Price Discrimination in ECO 204 (this version 2012-2013) University of Toronto, Department of Economics (STG). ECO 204, S. Ajaz Hussain. Do not distribute. Next, observe that the FOC: Implies that: ( Observe that the solution: ) which violates the KT condition . Notice right away that we have With these the prices become: ( ( ) ) Notice that: The price differential has been set exactly equal to the cost of arbitrage, eliminating arbitrage profits. 45 ECO 204 Chapter 17 & 18: Practice Problems & Solutions for Firms with Market Power: Business Apps and Price Discrimination in ECO 204 (this version 2012-2013) University of Toronto, Department of Economics (STG). ECO 204, S. Ajaz Hussain. Do not distribute. To be rigorous, we can show the same solution from possibility #2: We know that . With this, the first two FOCs become: so that: ( ( ) ) From: ( ) We have: ( ) ( ) From: We have: ( ) ( ) 46 ECO 204 Chapter 17 & 18: Practice Problems & Solutions for Firms with Market Power: Business Apps and Price Discrimination in ECO 204 (this version 2012-2013) University of Toronto, Department of Economics (STG). ECO 204, S. Ajaz Hussain. Do not distribute. The complete solution is: And the prices are: ( ( ) ) 47 ECO 204 Chapter 17 & 18: Practice Problems & Solutions for Firms with Market Power: Business Apps and Price Discrimination in ECO 204 (this version 2012-2013) University of Toronto, Department of Economics (STG). ECO 204, S. Ajaz Hussain. Do not distribute. (f) [This part is based on your answer to part (e)] Suppose D & H can choose to raise the cost of arbitrage either between NYC-Boston or between Boston-Toronto. Which one market would D & H choose to raise the cost of arbitrage? Show all calculations and state all assumptions. Answer: The firm’s problem is: Or: [ [ [ [ Express the cost of arbitrage in parametric form: [ [ By the envelope theorem the marginal profit of increasing the cost of arbitrage...
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