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Unformatted text preview: function for other questions. From the cost function above, note that the total variable cost of
()
serving the NYC market is
, the total variable cost of serving the Boston market is
()
()
and the total variable cost of serving the Toronto market is.
(d) Use the KuhnTucker/Lagrangian method to calculate D & H’s profit maximizing outputs, prices and (any) Lagrange
multipliers in all 3 markets in April 2010. Show all calculations and state any assumptions. Hints: Don’t forget the
constraint that total output capacity and that
.
(e) Now suppose there is a possibility of arbitrage between (i) NYC and Boston and (ii) between Boston and Toronto.
Assume the cost of arbitrage between NYC and Boston is $300 and the cost of arbitrage between Boston and Toronto is
$200. Use the KuhnTucker/Lagrangian method to calculate the optimal outputs, prices and (any) Lagrange multipliers
for all 3 markets in April 2010. (f) [This part is based on your answer to part (e)] Suppose D & H can choose to raise the cost of arbitrage either between
NYCBoston or between BostonToronto. Which one market would D & H choose to raise the cost of arbitrage? Show all
calculations and state all assumptions.
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: 5
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. 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.
(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 nu...
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