ajaz_eco_204_2012_2013_chapter_17__18_PP - University of...

University of Toronto, Department of Economics (STG). ECO 204, S. Ajaz Hussain. Do not distribute.
1
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)
Department of Economics (STG), ECO 204, Sayed Ajaz Hussain
_________________________________________________________________________________________________
P
RACTICE
P
ROBLEMS
W
ITH
S
OLUTIONS TO
:
C
HAPTER
17
AND
18 : Firms with Market Power: Business Applications and Price Discrimination
Updated: 4/17/2013
Question 17.1 True or false: a firm with ample capacity and market power charging optimal 1
st
degree price
discrimination prices will produce the same total output as if it were charging the “perfectly competitive” uniform price?
Do NOT solve any profit maximization problems and use graphs to illustrate your answer.
Question 17.2 A company with market power has constant returns and the following general Profit Maximization
Problem.
( ) ( ) ⏟
(a) Setup, solve, and derive the conditions for the various Kuhn-Tucker cases, given that the company can charge a
uniform price or 1
st
degree price discrimination prices. You must express all first order conditions and the conditions for
the Kuhn-Tucker various cases in terms of marginal revenue and marginal cost only. State all assumptions and show all
calculations.
(b) In the pap er “Econometric Analysis of Collusive Behavior in a Soft-Drink Market ” published in the Journal of
Economics and Management Strategy (Summer 1992), Gamsi, Laffont and Vuong (GLV) estimated the following demand
functions for Coke and Pepsi concentrate syrup based on quarterly data 1968 – 1986:
The subscript is for Coke and is for Pepsi where:
= quarterly quantity of syrup sold
= price of syrup (1986 dollars)
= square root of quarterly advertising expenses (1986 dollars)
{
= real income (1986 dollars)

University of Toronto, Department of Economics (STG). ECO 204, S. Ajaz Hussain. Do not distribute.
2
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)
The average values of the variables in the data set (except season) were:
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GLV also estimated Coke and Pepsi’s average variable cost to be (these are constant across seasons):
● ●
Assume Pepsi’s and Coke’s costs stem from manufacturing concentrate syrup only (think of Pepsi and Coke as producing
syrup for gate delivery).
What type of “returns to variable inputs” do Pepsi and Coke have? Give a brief explanation.
(c) Derive Pepsi’s demand curve for spring/summer and fall/winter. State all assumptions, show all calculations, and
derive all figures up to two decimal places .
(d) Assume Pepsi is a profit maximizer and charges a uniform price. What i s Pepsi’s “optimal capacity” in spring/summer
and fall/winter? State all assumptions, show all calculations, and derive all figures up to two decimal places . Hint #1: If
Pepsi were to build the production facility for the first time, what capacity would it choose? Hint #2: When is the value
of expanding capacity zero?