ps5_solution

# ps5_solution - c) Price Discrimination based on...

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Solutions for Problem Set 5 ECON 115 Question 1) a) There is a possibility of arbitrage in a market when it is possible to buy the good and then resell it for a higher price so that the price di/erential is greater than the transactional costs incurred. b) We say that a market is a natural monopoly when productive e¢ ciency c) A monopsony input. d) We say that a market is an oligopoly in that market. Question 2) Deadweight Loss: Triangle CBE Transfer of Surplus: Rectangle P*ABC Remark: We assumed that the MC was constant. Question 3) a) Given P = a bq we have: MR = P ( q ) q q = P ( q ) q q ± + q P ( q ) q ± = ( a bq ) bq = a 2 bq b) We need MR = MC therefore: a 2 bq = c , q M = a c 2 b ± thus: 1

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P M = a bq M = a b a c 2 b ± = a + c 2 ± Question 4) a) Perfect Price Discrimination: consumers±willingness to pay. b) Price Discrimination based on observable customer character- istics:

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Unformatted text preview: c) Price Discrimination based on Self-Selection: Firm designs di/er-ent menus for di/erent customers. . For example, high quality and high price for customers who appreciate high quality goods and low quality and low price for cheaper customers. Question 5) (see graph below) Notice that the monopolist sets the price such that P = MR while the social optimal requires P = MC: Question 6) Increasing the lenght of patent protection increases the incentives for &rms to innovate, because they will receive monopoly rents for a longer time. On the other hand, it also extends the duration of a monopoly. This leads to two consequences: greater deadweight social loss and a transfer of part of the consumer surplus to the &rm. Therefore, one has to balance these two e/ects in order to &nd out the optimal patent duration. 2 3 4...
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## This note was uploaded on 04/08/2008 for the course ECON 115 taught by Professor Stevenberry during the Fall '07 term at Yale.

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ps5_solution - c) Price Discrimination based on...

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