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Econ 404 Industrial Organization Dr. Johnston Homework # 2 Due Thursday April 16 Note: Bonus problems are not required work, nor worth extra points,...

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Econ 404 Industrial Organization Dr. Johnston Homework # 2 Due Thursday April 16 Note: Bonus problems are not required work, nor worth extra points, but you can earn my respect. Readings for Price discrimination are Chapters 9 and 10 in the book. Read examples 9.4,10.1, 10.3 and 10.5. Monopoly and Competitive fringe are discussed in Chapter 4 1. Monopoly: Demand: P =516 – 3Q Cost function: C(q) = 800+15q a) Solve for the Monopoly price and quantity b) Find the monopolist’s profit 2. Monopoly with Competitive Fringe: Demand: P =516 – 3Q Dominant firm cost: C(q d ) = 800+15q d Fringe firm cost: C(q f ) = 288+2q f 2 Number of fringe firms n = 4 a) Find the fringe supply b) Find the dominant firm’s residual demand c) Find the market price, quantity produced by the dominant firm and the fringe firms. d) [Bonus] Find the dominant firm’s profit. (Recall #1b) how much is the Monopolist willing to spend, say through lobbying the government, to maintain a monopoly rather than face the competitive fringe? e) Suppose “fringe” firms could enter this market (so n is longer fixed). What would happen to the market price? The quantity produced by each firm, the number firms? The quantity and profit of the dominant firm? Comment also about efficiency?(If you cannot solve for exact numbers then do your best describe what happens in this scenario using words and/or graphs)
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3. Monopsony a) Given the supply of labor, W= 8+L and a Monopsony firm’s labor “demand” of w= 80-L what quantity of labor are hired? What wage is paid? b) Suppose the monopsonist could perfectly price discriminate. What quantity of labor will the firm hire? Comment on the distribution of benefits and efficiency compared to part (b) c) Show (b) and (a) on a graph and label. 4. Quantity Discounts Suppose demand is given by q = 135 – p, and the constant marginal cost is 15. i) Find the single quantity block price and quantity (i.e the regular monopoly) ii) Find the optimal block prices if there are two blocks. (remember to use P 2 *(q2-q 1 )) ii) Find the optimal block prices if there are three blocks. iv) Is there a pattern between the quantity choices in i, ii and iii? (Hint: think about the relationship between quantities in each part and the y-intercept minus marginal cost 135-15=120) vi) What happens to the dead weight loss as the number of blocks increases? (Compare the DWL from a single block to two blocks, and generalize) v) [Bonus] Without doing math, can you guess the optimal block quantities if there are four blocks? N blocks? The limit as n approaches infinity? vii) [Bonus] Based on v and vi prove perfect price discrimination has a zero DWL 5. Two Part Tariff Suppose there are two consumers, and their demands are given below. Use the notation T = A +pq for a two part tariff, where A is the fixed fee and p is the marginal price (or user charge, or per unit fee). Type A's demand: q a = 120 – p Type B's demand: q b = 100 – p Cost of producing the total output (q a +q b ): 10(q a +q b ). i) Find the optimal two-part tariff if there is only type A in the market. ii) Find the optimal two-part tariff if both types of consumers are present and the monopolist must offer the same two-part tariff to each customer. iii) What are the efficient quantities to produce for each group? iv) What if only one price could be charged to the whole market? So this is a regular monopoly where total demand is Q=q a +q b = 120-9+100-p = 220-2P= Q v) Under part iv what quantity does group A buy and group B buy? (plug P into q a = 120 – p and q b = 100 – p to get q a and q b respectively) Is this more efficient than the quantities in part ii?
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