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Hubbard Principle of Economics Practice Questions for Test

Hubbard Principle of Economics Practice Questions for Test

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Published by: Maria Vega on Dec 11, 2010
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11/05/2012

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ADDITIONAL MONOPOLY TOPICS: PRICING STRATEGIES AND PUBLICPOLICYSelf-Test Problems1.
Suppose adults have the demand curve
 P 
a
= 30 − (1/5)
q
a
for tickets to a local communitytheater. Children have a demand curve of 
 P 
c
= 10 − (1/10)
q
c
. Furthermore,
MC 
=
 AC 
= 2.a. Solve for the price charged and number of tickets sold in each separate market. Draw agraph. b. Solve for total consumer surplus, total producer surplus, and monopoly profit. Labelthese areas on your graph.c. Now, assume the theater wants to charge a single, uniform price in both markets. Solvefor the combined demand curve. (Remember, it will have a kink.)d. Calculate the uniform price charged and the total number of tickets sold. Draw a graph of the combined demand, and show the uniform price charged and total amount sold.e. Solve for consumer surplus, producer surplus, and monopoly profit with a uniform price.Label these areas on the graph you created in response to (d), above.f. Compare profits in (b) to profits in (e). Which pricing method does the producer prefer?g. Prove that, in this case, third-degree price discrimination decreases total welfare.
Answer:
a. See the graphs above. Set
MR
=
MC 
in each market. In the adult market,
MR
= 30 – (2/5)
q
a
, using the twice-as-steep rule. Set
MR
a
=
MC 
; 30 – (2/5)
q
a
= 2; (2/5)
q
a
= 28;
q
a
= 70;
 P 
a
= 30 – (1/5)(70) = 16. In the children's market,
MR
= 10 – (1/5)
q
c
. Set
MR
c
=
MC 
; 10 – (1/5)
q
c
= 2; (1/5)
q
c
= 8;
q
c
= 40;
 P 
c
= 10 – (1/10)(40) = 6.
 
 b. In the adult market, consumer surplus = (1/2)(30 – 16) × 70 = 490, labeled area
 A
ingraph (a), and producer surplus = (16 – 2) × 70 = 980, labeled area
 B
in graph (a). In thechildren's market, consumer surplus = (1/2)(10 – 6) × 40 = 80, labeled area
in graph (b)and producer surplus = (6 – 2) × 40 = 160, labeled area
 D
in graph (b).Total consumer surplus is 570 and total producer surplus/profit is 1,140. (Because
MC 
=
 AC 
, profits and producer surplus are equal.) Total surplus is 570 + 1,140 = 1,710.c. See the graph below. We need to horizontally sum the two demand curves,
 P 
a
= 30 – (1/5)
q
a
; (1/5)
q
a
= 30 – 
 P 
a
;
q
a
= 150 – 5
 P 
a
;
 P 
c
= 10 – (1/10)
q
c
; (1/10)
q
c
= 10 – 
 P 
c
;
q
c
= 100 – 10
 P 
c
;
Q
=
q
a
+
q
c
= 150 – 5
 P 
+ 100 – 10
 P 
;
Q
= 250 – 15
 P 
for 
 P 
≤ 10. The kink will occur at
 P 
= 10. Note that, at
 P 
= 10,
q
a
= 150 – 5(10) = 100 and
Q
= 250 – 15(10) = 100. For pricesless than 10, the market demand curve is
Q
= 250 – 15
 P 
or:
 P 
= 16.67 – (1/15)
Q
or 
 P 
= 16.67 – 0.067
QMR
= 16.67 – (2/15)
Q
or 
MR
= 16.67 – 0.133
Q
d. Now, set
MR
=
MC 
and get 16.67 – (2/15)
Q
= 2; 14.67 = (2/15)
Q
;
Q
= 110. (Note that,depending on how you round 16 2/3, you might get a small decimal place after 110. But, weknow from our answer to (a), above, that
Q
= 110, so we'll round to 110).
 
 P 
= 16.67 – (1/15)(110) = 9.34. (See the graph above.) Note that, at
Q
= 100,
MR
in theadult market equals –10.
MR
from the market demand curve is 3.34. There's a big jump inthe
MR
curve at
Q
= 100.

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