Professional Documents
Culture Documents
Which of the following statements is/are correct? Choose all that apply.
First degree price discrimination means that a monopolist sells different units of a
product for different prices. As different units of the good may be purchased by
different individuals, these prices may differ from consumer to consumer.
Second degree price discrimination means that a monopolist sells different units
of the product for different prices, but every consumer who buys the same
quantity of output pays the same price.
Third degree price discrimination means that a monopolist sells different units of
the product for different prices, but every consumer who buys the same quantity
of output pays the same price.
First degree price discrimination means that a monopolist sells output to different
consumers for different prices, but each unit sold to any one consumer group
carries the same price.
First degree and second degree price discrimination are as defined in the first two
statements. The 4th statement is only correct if each consumer group consists of a
single consumer. Otherwise, this is the definition of third degree price
discrimination. Similarly, the 3rd is the definition of second degree price
discrimination, not third degree price discrimination. It is, then, incorrect.
Homework Question 2
The consumer's reservation price for a good is defined as the consumer's maximum
willingness to pay for the good. The monopolist might not charge the consumer's
reservation price for a good if, for example, price discrimination is not possible. For
example suppose that arbitrage is easy. In this case, the monopolist would have to
follow a uniform pricing strategy. Hence, it would optimally charge the price at which
marginal revenue equaled marginal cost. This could very well not be the reservation
price of any single customer. Hence, the 1st choice is incorrect. Further, the 2nd is
incorrect, as the reservation price across customers may or may not be the same. For
example, I might have the same maximum willingness to pay as another person for an
apple. I might also like apples much more than other people and have a high
maximum willingness to pay compared to others. Either is possible.
Homework Question 3
a case when customers may buy one product only if they agree to buy another
product as well.
a case when many units of the same good are sold in a package.
Homework Question 4
A firm must have some idea of the different amounts people will pay for its
product, have some market power, and be able to prevent arbitrage.
A firm must both have market power and be able to prevent arbitrage only.
All three degrees of price discrimination can only work when certain underlying
conditions are fulfilled. First, the firm that conducts the price discrimination must
have market power: it must face a downward-sloping demand. If it is a price taker,
then consumers will flock to the lowest priced supplier and it is impossible for any
firm to raise price above this level. Second, it must not be possible for consumers to
resell the product. In other words, it must not be possible for a customer who buys the
product for a low price to resell the product to another customer with a higher
willingness to pay. If such resale were possible, the surplus would be captured by the
customers who bought the product for the low price and not by the monopolist. Third,
the firm must have some idea of the amounts people will pay for the product in order
to have an idea of how to conduct discrimination.
Homework Question 5
Which of the following refer(s) to a "screening mechanism"? Choose all that apply.
Homework Question 6
With first degree price discrimination by a monopolist (choose all that apply):
Consumer surplus is small, but greater than zero and deadweight loss is small, but
greater than zero.
Homework Question 7
Suppose that a monopolist faced demand P = 120 - 4Q and has constant marginal cost
MC = 30. If this monopolist engages in first degree price discrimination, total output
will equal:
11.25
22.5
30
The monopolist will sell units up to the point where marginal cost equals price, or
where 120 - 4Q = 30. Solving this equation, the optimal output will be Q* = 22.5.
11.25 is obtained by setting marginal revenue equal to marginal cost for a uniform
pricing monopolist. For such a firm, marginal revenue is less than price, so that output
is lower. For a price discriminating monopolist, marginal revenue equals price.
Hence, the correct response is obtained by setting price equal to marginal cost. If we
do this, we obtain 22.5.
Homework Question 8
300
150
100
The price discriminating monopolist produces up to the point where price equals
marginal cost or 60 - 3Q = 30. Solving this, we see that Q* = 10 (and P* = 30).
Hence, the welfare triangle above marginal cost and below demand is the area of
producer's surplus. The vertical height of the triangle is 60 - 30 and the horizontal
width of the triangle is 10. We must divide this by 2 and multiply to obtain the
area of the triangle so that PS = (60-30)(10)/2 = 150. The 1st answer fails to divide
by 2.
Homework Question 9
Homework Question 10
Let there be two types of customers in the market for a good, type 1 has a low demand
for the good and type 2 has a high demand, as shown in the figure in Question 10.
Compare two pricing schemes. In the first scheme, suppose that all customers are
charged price P1 for the good. Call this the uniform pricing scheme. In the second, all
customers are charged P1 for the first Q1 units consumed and P2 for any additional
units. Call this the block pricing scheme. Which of the following statements is true?
Type 1 will consume Q1* under uniform pricing. Type 2 will consume Q2* under
the uniform pricing scheme.
Type 1 will consume Q1* under the block pricing scheme. Type 2 will consume
Q2* under the block pricing scheme.
Type 1 will consume Q1** under the block pricing scheme. Type 2 will consume
Q2* under the block pricing scheme.
Homework Question 11
Suppose that a monopolist supplies a good to its home market at a marginal cost of
10. It also supplies the good to a foreign market, but since all its production facilities
are in the home market, it must add a transportation cost of 5 per unit to the
production cost in order to sell the units in the foreign country. Inverse demand at
home is PH = 60 - 5Q. Inverse demand in the foreign country is PF = 30 - .25Q. What
is the profit maximizing price for the monopolist in each country?
PH = 25; PF = 25
PH = 35; PF = 25
PH = 35; PF = 22.5
Since each consumer can be identified as a member of a particular group, the profit
maximizing price will be chosen to equate marginal revenue to marginal cost for that
group's demand curve. If the marginal cost differs across the two markets, the profit
maximizing price will be chosen to equate each market's marginal revenue equal to
each market's marginal cost (MR1 = MC1 and MR2 = MC2, where MRi and MCi are
the marginal revenue and marginal cost in market I). Hence, the monopolist sets
marginal revenue at home equal to marginal cost at home so that MRH = 60 – 10Q =
10 = MCH so that Q*H = 5. Substituting into home demand, PH = 35. The monopolist
sets marginal revenue abroad equal to marginal cost abroad so that MRF = 30 - .5Q =
15 = MCF so that Q*F = 30. Substituting into foreign demand, P*F = 22.5.
Homework Question 12
Consider the following willingnesses to pay (reservation prices) for one unit of each
of two goods in a market with four customers. The market is supplied by a monopolist
with zero marginal cost of production of both goods.
What is the monopolist's profit-maximizing (uniform) price for good 1 separately, P1,
good 2 separately, P2 under a strategy of selling the goods separately? What is the
price of a bundle consisting of one unit of each good, PB if only the pure bundle will
be offered?
What is the optimal price to set for each good and the bundle if a strategy of mixed
bundling is followed ?
Homework Question 14
The profit maximization condition for the advertising monopolist is (choose all that
apply):
The ratio of advertising expenditure to sales revenue must vary according to the
relative responsiveness of demand to advertising expenditure.
Homework Question 15
0.5
-0.5
From the inverse demand, we get Q = 10A1/2P-1/2 so that EQ,A = ½ and EQ,P = -1/2.
Hence, the advertising intensity is A/(PQ) = - EQ,A/EQ,P = -(1/2)/(-1/2) = 1.