Q. 1.

In a perfectly competitive market structure, we know that the marginal cost will be considered as
the supply curve. Therefore, the optimal price and quantity will be where supply intersects with
demand.

Therefore, at point B at a price Pc and quantity Qc we get the equilibrium in a perfectly competitive
market. At this price and quantity, the Producer surplus is denoted by the point BEP C and the
consumer surplus is denoted by BFPC.

Now, since the market will shift to a monopolistic market the considerations would change. As in a
monopoly, firms supply when marginal cost is equal to marginal revenue. Therefore, the price P M and
quantity QM is the resultant price and quantity demanded where MC = MR.

In this market scenario there comes a shift in the surpluses. The consumer surplus now, denoted by
AFPM, is reduced from what it was in perfect competition. But the resultant change in the producer
surplus is denoted by ADEPM.

Therefore, the main changes to surplus to consider in the monopolistic market is, consumer lose out
on surplus denoted by ACPCPM & ACB. Producers gain surplus denoted by ACPCPM but lose out on
BCD.

Q4
Ans: The market for beef must first be considered at equilibrium where supply and demand are at
optimum price P and quantity Q. When we factor in the new consumer awareness of global warming
linked to cattle farming, we can plausibly predict that there will be a decrease in the demand for
beef, denoted by a left-ward shift in the demand curve from D to D’.

The market of grass that cattle eat, with market equilibrium price P’’ and quantity Q’’, is a
complementary market to beef, as beef is cattle that will be eating the grass. A price increase in
fertilizers in the market for grass fed to cattle is an increase in supply costs, which means a left-ward
shift of the supply curve. Resulting in less quantity of grass available in the market and arriving at a
new market equilibrium of P’’’ and Q’’’ in the market for grass fed to cattle.

Since cattle need grass to be fed and a dearth of grass that can be fed to cattle, this will result in less
numbers of cattle that can be ready for market, as a result of death, malnourishment of cattle etc.
The effect the price increase in the fertilizers will have on beef is a reduced supply in the market for
beef. This will result in a left-ward shift of the supply curve in the market for beef, from S to S’. This is
again result in a new market equilibrium with price P’ and quantity Q’ in the market for beef. The
extent of reduction of price is unknown but as we can see diagrammatically the price change is
minimal since both supply and demand are decreasing.

Q.3
Ans: The market, before subsidy, at initial equilibrium having price P and quantity Q will change
when the subsidy comes in. Once the subsidy effect has taken place the supply will shift right-ward
from S  S’ giving the market a new equilibrium with price P’ and quantity Q’.

A subsidy means that the government is willing to take on some costs of these companies. The cost
that will be taken on by the government is denoted by points P’’ABP’. This is because the subsidy
affects the change in supply. When the companies then produce at Q’ quantity the resultant price
taken on by the government which will be calculated at price which otherwise would have been on
initial supple curve S we get a price of P’’.

Since consumers are now getting heat pumps at a lower price, we can say that they are now making
a saving. The specific saving that they are making is denoted by PP’ED.

For the companies, they end up making revenue without incurring costs that have been shifted onto
the government. Previous to the subsidy, companies were only earning he area denoted by PDQO,
but once the subsidy has come in their revenue has increased to P’’AQ’O.

But in this regard, there will come a loss to the society due to the inefficiency in the market created
due to government interference. This is otherwise known as a welfare loss. The welfare loss is
denoted by DAB.

Q. 7

Ans: Since first bus is the only tourist focused bus service in Bath, they have a monopoly in the
tourist bus market in bath. They therefore have all the power in the market, meaning they are
primed for price discrimination that can possibly lead to profits in the future. There will not be any
fear of losing customers to rivals as they are a monopoly.
Therefore, Bath Bus Company is facing an issue with targeting different customers that are primed
slightly missed out due to their singular ticker pricing method. There are a number of ways Bath bus
company can discriminate based on price.

The company can sell a ticket at a different price to each customer. This is a valid assessment
through which we can arrive at a benchmark to compare their price strategy at. To give an example
would be that the company invest in AI algorithms and shift to a completely app based software
whereby they have enough information to provide different prices to each customer. But the
efficiency of deciding the factors is infinity. There will never be a consumer surplus in this case,
meaning no ticket will go unsold.

In the scenario of perfect price discrimination, we can see that the abnormal profits denoted by OBP’
is arrived at because in perfect there is no loss of revenue as opposed to the uniform price of
singular tickets as we can capitalise on prices demanded at every point.

In the scenario of second degree price discrimination, we can give it for different price to different
customers. It can be based on quantity, meaning that if each person buys tickets in bulk then they
will be getting a reduction in the total value per ticket. In the scenario of the quantity of ticket that
can be sold, each area of revenue is given by the area shaded with orange denoted by P’AFG, blue
denoted by HBDF and green denoted by ICED. This strategy will also provide a consumer surplus also
denoted by OP’A, AHB and BIC for prices P’, P & P’’ respectively.

In the final scenario of third-degree price discrimination we have categories within which we can
have separate pricing. For example, the city of bath has a huge school and college population owing
to the schools and colleges that surround the city meaning bath bus company can make separate
pricings for students want a tourist bus ride and another price for other tourists. When we look at
the comparison of both market we can see that when we see the demand functions of customers
that are sensitive to price and those that aren’t are considered then we can arrive at a profit
maximising single price which is a method that the bath bus company can use.
The best method that I would prescribe is the third -degree price discrimination as the company will
be still able to stick to a single price ticket if they wish to, but they will arrive at after doing much
better research of the market.

But if possible, then the best option would be for the company to do pure price discrimination as
then they will maximise profitability the most. Second degree price discrimination is not advised.