Principles of Microeconomics
8th Edition
ISBN: 9781337470384
Author: N. Gregory Mankiw
Publisher: Cengage Learning US
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Chapter 22, Problem 2PA
To determine
The problem ofadverse selection.
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Why is pricing one of the most critical and complex decisions a pharmacy manager has to make?
A distillery makes whisky, where its profits from production per bottle are given by T = p – y? where p is the price it charges per bottle and y is the
number of years the bottle is aged. There are two types of whisky drinkers, connoisseurs (H type) and casuals (L type). H-type have utility
UH (y, p) = 8y – p, while L-type have utility uz (y, p) = 2y – p. There are 10 consumers of each type, and each will buy at most one bottle. Each
consumer's utility if she does not buy is 0. If a consumer is indifferent between buying two bottles, assume she will buy the more aged one (the one with
higher y). If a consumer is indifferent between buying a bottle and not buying, assume she will buy.
Bottles are characterised by (y, p), years of age and price. For each menu of offerings below, calculate the distillery's profit.
(1, 9) and (4, 24)
(1, 2) and (4, 24)
(1, 2) and (2, 24)
Calculate the firm's profits when it chooses the optimal menu.
When would consumers and producers experience increased difficulty in coordinating their plans
Chapter 22 Solutions
Principles of Microeconomics
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