ECON 444 Homework 5 Problem Set 5 Answers (Penn State University) Problem 1. TomsonBook is the monopoly publisher which produces the textbook “Corporate Economics.” TomsonBook sells in two separate markets, domestic mark
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ECON 444 Homework 5 Problem Set 5 Answers (Penn State University) Problem 1. TomsonBook is the monopoly publisher which produces the textbook “Corporate Economics.” TomsonBook sells in two separate markets, domestic market and international market. The inverse demand function in domestic market is pD =600−qD while the inverse function in international market is pI =450−qI. The firm’s total cost function is c(qD qI)=(qD qI)2. Suppose TomsonBook can charge different prices in each of the two markets. Problem 2. A coffee shop manager realizes that demand for coffee is more elastic among students, and is trying to determine the optimal pricing schedule. Specifically, she estimates the following average demands: • Student: qS = 18 − 5p; • Non-student: qN = 10 − 2p. The two groups visit the coffee shop in equal numbers on average. Assume that the marginal cost for coffee is $3 and there is no fixed cost. Problem 3. Suppose a flower shop has a monopoly in the market for a new type of orchid, which no other flower shop is able to produce. Because this orchid is very rare, every consumer’s individual demand for these orchids is Q = 125 - 2P. There are 100 consumers. The flower shop is able to produce the orchid at a marginal cost of $25. Problem 4. True or False. When a monopolist can perfectly discriminate between consumers (e.g. person- alize its pricing), the market outcome is not efficient. A Two-Part Tariff is a form of price discrimination because it affects the price of the good on the margin. 3. Quantity discounts is an example of 3rd Degree price discrimination. 4. A monopolist that optimally prices according to a menu extracts all the surplus from the consumers who place the highest value on the good.
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