ajaz_eco_204_2012_2013_chapter_17__18_PP

Use the individual demand curve in part a and

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Unformatted text preview: s are minimized when . 54 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. (e) Suppose in April 2010, D & H sells jackets in NYC through a two part tariff where each customer pays an access fee for the right to buy jackets and a “usage” price for each jacket. Use the individual demand curve in part (a) and calculate the optimal and (answers with decimal places are OK). Graph your solution below. Hints: Allow for the possibility , and choose and to . [Do two part tariff pricing in this part only]. Answer: This question is solved for 1 customer. Strictly speaking, it should be solve for all customers. Allowing the access fee should be set to extract all consumer surplus. Recall that: Thus: The problem is depicted below: MC $ AVC 1,000 P A = CS 300 Individual demand curve q Now, we want to choose and q to: 55 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. Now: ( ) ( The of serving the NYC market is the ) of manufacturing plus the of distribution: () The problem becomes: ( It’s easier to solve for than for [ ) Substituting we have: ( ) ( ) ( ( ) ) [ [ The FOC is: This implies: 56 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. ( ) And: ( ( ) )( ) The two part tariff solution is: The consumer will purchase 4.67 jackets. MC $ AVC 1,000 $1090.45 533 300 Individual demand curve 4.67 q (f) Now suppose that in April 2010 D & H sells jackets in NYC through 1st degree price discrimination. Use the individual demand curve in part (a) to calculate the optimal prices and number of jackets (answers with decimal places are OK...
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