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Unformatted text preview: between markets 1 and 2 by $1 is: By the envelope theorem the marginal profit of increasing the cost of arbitrage between markets 2 and 3 by $1 is: Since D & H should raise the cost of arbitrage between Boston and Toronto. 48
ECO 204 Chapter 17 & 18: Practice Problems & Solutions for Firms with Market Power: Business Apps and Price Discrimination in ECO 204 (this version 20122013) University of Toronto, Department of Economics (STG). ECO 204, S. Ajaz Hussain. Do not distribute. Question 17.5 [For this question, use information from Question 17.4] Recall that D & H has 10 individual customers in
NYC (“market 1”).
(a) Recall from question 1 (a) that the NYC market demand curve is: Assuming all NYC customers are identical, use this market demand curve to derive the individual NYC customer’s
demand curve. Show all calculations and state any assumptions.
Answer:
The NYC market has 10 customers. Denote individual demand by
definition it must be that: . Assuming NYC consumers are price takers, by We know that: This implies: Substitute in: ( ) 49
ECO 204 Chapter 17 & 18: Practice Problems & Solutions for Firms with Market Power: Business Apps and Price Discrimination in ECO 204 (this version 20122013) University of Toronto, Department of Economics (STG). ECO 204, S. Ajaz Hussain. Do not distribute. We can check if this is right. In January 2010,
same answer from: and so that each customer bought 1 jacket. We get the 50
ECO 204 Chapter 17 & 18: Practice Problems & Solutions for Firms with Market Power: Business Apps and Price Discrimination in ECO 204 (this version 20122013) University of Toronto, Department of Economics (STG). ECO 204, S. Ajaz Hussain. Do not distribute. (b) [This part should be answered independently of part (a)] Suppose each individual NYC customer has the utility
function:
(
)
(
)
Here is savings in dollars and is the number of D & H jackets. Denote income by and the price of good 1 (D & H
jackets) by . Solve the UMP and derive expressions for and in terms of the parameters
and (i.e. don’t
use numbers for ).
Answer:
Note that is savings in dollars so that the consume...
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 Fall '14

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