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- Consider a monopolist who is selling his blockbuster drug in two markets where one market is much larger than the other. Suppose the demand in the two markets is given by q1 = 30 − p1 and q2 = 3 − p2 (quantity is measured in millions of complete dosages and price is in your favorite currency) and the marginal cost of production and distribution is roughly the same and equal to 1 per unit (c=1). This problem asks you to compare equilibrium outcomes (prices, quantities, profits, consumer surplus, and consumer surplus per unit of output) when the monopolist can price discriminate across the two markets versus when it must set a uniform price. It then asks you to comment on some recent policy proposals. For each market separately, set up and solve the monopolist’s profit-maximizing problem. Specifically, write down/compute the following. Inverse demand and the profit functions. Equilibrium prices (), quantities () and profits () Consumer surplus () and consumer surplus per unit of…1.) GM’s Food Shops has completed a study of weekly demand for its “new-fashioned” tacos in 53 regional markets. The study revealed that where Q is the number of tacos sold per store per week, A is the level of local advertising expenditure, Pop denotes the local population (in thousands), and Pr is the average taco price of local competitors. For the typical GM’s outlet, P = P1.50, A = P1,000, Pop = 40, and Pr = P1. Q = 400 - 1,200P + 0.8A + 55Pop + 800Pr Estimate the weekly sales for the typical GM’s outlet. Determine the equilibrium price and equilibrium quantity, if supply is Qs = 700 + 1,200P considering the general demand function of GM’s outlet Should GM raise its taco prices? Why or why not?Suppose you are the owner of a movie theater. There are two types of customers: senior (‘s’) and non-senior (‘ns’). You know if a customer is a senior or non-senior and so you could use price discrimination with selection by indicators. The demand for movies is: Senior: qs = 30 − 3ps Non-Senior: qns = 15 − pns 1. Plot the total demand curve and the marginal revenue curve if the two types of consumers are as one. 2. Suppose that MC = 1 and that you can only set a single price. 2a. What is the optimal uniform price? 2b. What is the profit under uniform pricing? 2c. What is consumer surplus under uniform pricing?
- The steps for solving a maximization problem can include A. Using the constraints to eliminate some variables B. Finding the partial derivatives with respect to controls or choices C. Solving the FOC for the optimal choice D. All of the Above The definition of competitive equilibrium is A. A fight among firms that has drawn to a tie B. Allocations and prices such that all agents behave optimally and markets clear C. An economy in which each firm monopolistically sets prices D. Where the governmental exogenously sets prices to maximize welfareYou operate the only fast-food restaurant in town, selling burgers and fries. There are only two customers, one of whom is on the Atkins diet and the other on the Zone diet, whose willingness to pay for each item is displayed in the following table. For simplicity, assume you have zero fixed and marginal costs for each item. a) If x = 1 and you do not bundle the two products, what are your profit-maximizing prices PB and PF? Calculate total surplus under this outcome. b) Now assume only that x + 0. Instead, suppose that you hired an economist who tells you that the profit-maximizing bundle price (for a burger and fries) is $8, while if you sold the items individually (and did not offer a bundle) your profit-maximizing price for fries would be greater than $3. Using this information, what is the range of possible values for x?A golf cub’s owner has commissioned a market study that estimates the average customer’s monthly demand curve for playing 18-hole golf game to be Q=50 – 0.5P, where Q stands for the number of 18-hole golf game, and P is the green fee. The marginal cost is given by MC=20. (1) Under two-part pricing strategy, what is the optimal amount of green fee to charge for one round of 18-hole golf game? (2) Under two-part pricing strategy, what is the optimal amount of membership due? (3) Under two-part pricing strategy, what is the size of the profit obtained from the average customer?
- A golf club’s owner has commissioned a market study that estimates the average customer’s monthly demand curve for playing 18-hole golf game to be Q=50 – 0.5P, where Q stands for the number of 18-hole golf game, and P is the green fee. The marginal cost is given by MC=20. (1) Under two-part pricing strategy, what is the optimal amount of green fee to charge for one round of 18-hole golf game? (2) Under two-part pricing strategy, what is the optimal amount of membership due? (3) Under two-part pricing strategy, what is the size of the profit obtained from the average customer?Changes in net revenue from price discrimination Consider the market for airline tickets on Flying High Airlines from Los Angeles to Chicago. The following graph shows the demand curve, marginal revenue (MR) curve, and marginal cost (MC) curve for this particular flight. In particular, the cost of adding another passenger to an otherwise empty seat is constant at $150. For simplicity, assume throughout this question that there are no supply constraints caused by seating capacity limitations. Suppose Flying High Airlines sells each seat on the plane for the same price. Place the purple point (diamond symbol) on the graph at the profit-maximizing price and quantity. Dashed drop lines will automatically extend to both axes. Then, place the grey rectangle (star symbols) to shade the area representing net operating revenue at the profit-maximizing price and quantity. Suppose now that Flying High Airlines discovers that business travelers’ demand for airline tickets is more inelastic…Elizabeth Airlines (EA) flies only one route: Chicago-Honolulu. The demand by business people for each flight is QA = 260 – 0.4P while the demand for students for each flight is QB = 240 - 0.6P. EA’s cost of running each flight is $30,000 plus $100 per passenger. The airline is able to perfectly distinguish students from business people. Which of the following statements is true? Note the demand equations must be rewritten as inverse demand equations to solve this problem. A. The profict maxmizing quantity sold to students is 110 and the profit maximizing price charged to students is $375. B. The profict maxmizing quantity sold to students is 90 and the profit maximizing price charged to students is $375. C. The profict maxmizing quantity sold to students is 110 and the profit maximizing price charged to students is $250. D. The profict maxmizing quantity sold to students is 90 and the profit maximizing price charged to students is $250.
- A firm is a profit-maximizing monopolist in the market of a patented computer software. As an economic analyst,you observe the following data:a) The monopoly’s price is set at $50 per copy.b) The monopoly’s total revenue is $300,000.c) The monopoly’s marginal cost at the profit-maximizing quantity is at $30 per copy.Based on the observed data, please determine the linear inverse demand function.Fill in the blanks. Suppose the inverse demand function is of the formwhere a, b are both positive constants, determine the value for a: 1 and b: 2 .Hint: a should be an integer, the answer for b should round to four decimal places.Consider a “market” with differently substitute goods. Firms1 and 2 produce homogeneous goods, but firm 3 produces a differentiated (imperfectlysubstitute) good. Thus, the inverse demand functions for each of the firms are:P1 = 1 − 2q1 − 2q2− .5q3P2 = 1 − 2q2 − 2q1− .5q3P3 = 1 − 2q3 − .5q1− .5q2All firms have zero costs. They compete in quantities. We want to study this “market” todefine a relevant market as traditionally done by antitrust agencies, and to that end weare going to perform the SSNIP test. The question is whether the product offered by firm3 is in the same “market” as that offered by firms 1 and 2. Thus, we need to know if a“hypothetical” monopoly (or cartel) producing goods 1 and 2 would increase the price bya 5-10% at least. Thus,(a) let us first compute the prices in this “market” as it is. (You can use symmetrybetween firms 1 and 2, so that you expect q1 = q2, to speed up the computationof equilibrium outputs and prices.)(b) Now consider a hypothetical monopoly that…The information in the table below shows the total demand for premium-channel digital cable TV subscriptions in a small urban market. Assume that each digital cable TV operator pays a fixed cost of $200,000 (per year) to provide premium digital channels in the market area and that the marginal cost of providing the premium channel service to a household is zero. 1. Assume there are two profit-maximizing digital cable TV companies operating in this market. Further assume that they are not able to collude on the price and quantity of premium digital channel subscriptions to sell, how many premium digital channel cable TV subscriptions will be sold altogether and what price will be charged when this market reaches a Nash equilibrium? 2. Under the conditions given in Question #3 of this problem, how much profit will each firm earn when this market reaches a Nash equilibrium? 3. What is the socially efficient level of digital premium channel subscriptions for this market and at what…