solutions_module4_practice
.pdf
keyboard_arrow_up
School
Johns Hopkins University *
*We aren’t endorsed by this school
Course
BU.220.620
Subject
Economics
Date
Jun 24, 2024
Type
Pages
6
Uploaded by DukeMusic14732
Module 4 Extra Practice Problems
For Questions 1 - 5, choose the best answer.
1. A seller engaging in perfect price discrimination (first-degree price discrimination)
A. charges each buyer their maximum willingness to pay.
B. charges different prices to each customer based upon different costs of delivery.
C. generates a deadweight loss to society.
D. charges lower prices to customers who buy greater quantities.
E. maximizes consumer surplus.
Solution:
A firm that engages in perfect/first-degree price discrimination, charges each buyer their
maximum willingness to pay for all quantities. As a result, all consumer surplus is captured by the
seller and there is zero deadweight loss.
2. Consumers who have a relative high willingness to pay for a good:
A. are likely to have a higher consuemr surplus under perfect price discrimination.
B. are likely to have a higher consumer surplus under a single-price monopoly.
C. are likely to have the same consumer surplus under first-degree/perfect price discrimination
and a single-price monopoly.
D. are likely to have the same consumer surplus under third-degree price discrimination and a
single-price monopoly.
Solution:
A consumer who puts a high-value on a good will be charged their value under perfect
price discrimination–resulting in zero consumer surplus.
Under a single price monopoly however,
they will pay lower than their willingness to pay (as the monopolist will set MR = MC for the entire
market). Similarly, under third-degree price discrimination, the firm will segment the market based
on value and the consumer will pay a higher price than under the single price monopolist–resulting
in lower consumer surplus.
3. A two-part pricing monopolist
A. creates deadweight loss.
B. increases market inefficiency.
C. captures all consumer surplus.
D. decreases total welfare.
E. decreases producer surplus
Solution:
A firm engaged in two-part pricing charges P = MC for all units and an up-front fixed-fee
equal to the would-be consumer surplus when P = MC. As a result, the producer captures all the
consumer surplus and there is zero deadweight loss (and therefore no market inefficiency).
4. A firm engaging in third-degree price discrimination can sell its output in its domestic market or in a
foreign market. Having sold a certain level of output in these two markets, it discovers that its marginal
revenue in the domestic market is
42 while its marginal revenue in the foreign market is
40. Assume
that the marginal costs of distribution and production are the same in both markets.
To maximize
profits from the sale of this level of output, the firm for sure should
A. have sold more output in the domestic market and less in the foreign market.
B. do nothing until it acquires more information on costs.
C. have sold less output in the domestic market and more in the foreign market.
D. have sold only in the domestic market.
E. have sold only in the foreign market.
Solution:
The firm should allocate sales across market segments such that
MR
Domestic
=
MC
and
MR
F oreign
=
MC
. Since MC is the same in both markets, this implies that
MR
Domestic
=
MR
F oreign
at the profit maximizing solution. Since
MR
Domestic
> MR
F oreign
, ( 42
>
40), the
firm should sell more in the domestic market where incremental revenues are higher.
5. Suppose all individuals are identical, and their monthly demand for Internet access from Xfinity can be
represented as
P
= 5
−
0
.
5
Q
(or
Q
= 10
−
2
P
) where
P
is price in
per hour and
Q
is hours per month.
Xfinity faces a constant marginal cost of
1.
Which of the following pricing schemes will lead to the
highest profit for Xfinity?
A. Set a per-unit price =
1
B. Set a per-unit price =
3
C. Set a per-unit price = 1 plus have a fixed-fee =
16
D. Set a per-unit price = 3 plus have a fixed-fee =
4
E. Set a fixed-fee =
25 and allow all goods to be free (P =
0)
Solution:
The two-part tarrif will always extract the maximum amount of consumer surplus and
therefore maximize profit. In a two-part tarrif, P = MC, and the fixed-fee is the would-be consumer
surplus at that per-unit price. The other choices all results in lower profit for Xfinity. Choices A &
B leave consumer surplus on the table. Choice D captures all possible consumer surplus when P =
3 but results in deadweight loss that could be converted to profit under a two-part tarrif. Choice
E is not profit-maximizing as Xfinity would lose on its per-unit sales since P
<
MC. The graphs
below illustrate all of these choices. Remember that profit under each choice will include fixed fees
(if any) pluis any revenue earned on the per-unit sales minus any per-unit costs.
P
P = 1
8
5
MC = 1
10
Profit = 1(8) – 1(8) = 0
Page 2
P
P = 3
4
5
MC = 1
10
Profit = 3(4) – 1(4) = 8
Q
P
P = 1
8
5
CS = fixed fee = ½*(4)(8) = 16 MC = 1
10
Profit = 16 + 1(8) – 1(8) = 16
Q
P
P = 3
4
5
CS = fixed fee = ½*(2)(4) = 4 MC = 1
10
Profit = 4 + 3(4) – 1(8) = 8
Q
Q
P
P = 0
5
CS = fixed fee = ½*(5)(10) = 25 MC = 1
10
Profit = 25 + 0(10) – 1(10) = 15
Page 3
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
- Access to all documents
- Unlimited textbook solutions
- 24/7 expert homework help
Related Questions
2. Monopoly, Practice Question
Firm P is a monopolist for a new drug that makes people feel thinner. the total cost
function is
C(Q) = 200 + 10Q + Q²
The inverse demand function is
p(Q) = 82 - Q
(a) By how much do revenues increase if this firm sells one more (small) unit of output?
By how much does its cost go up if it produces one more (small) unit of output?
(b) What is the optimal price and quantity the monopolist should charge and sell?
(c) What is the profit the monopolist makes? Should the firm shut down in the short or
long run?
(d) If the company increases its price by a small fraction (let us say 1%), by what
proportion does demand go down? [Round to two decimal places.]
(e) What percentage of the price is due to costs and what is due to markup? [Round to
two decimal places.]
(f) What is the deadweight loss of the monopoly pricing compared to competitive prices?
arrow_forward
8. You are an owner of a local Toyota dealership. Your dealership earned record profits of
13 million. In your market, you compete against two other dealers, and the market-level
price elasticity of demand for Toyota cars is -1.5. The marginal cost of a car is 120000.
What price should you charge for a Toyota car if you expect to maintain your profits?
arrow_forward
7. If a firm practices first-degree price discrimination, the firm must:
(a) have customers with identical demand curves.
(b) have complete information about each customer's unique demand curve before the customer
buys the product.
(c) be able to identify each customer's demand curve after the customer buys the product.
(d) lack market power but know how its customers differ by their willingness to pay for the product.
(e) (b) and (d)
(f) (a) and (c)
(g) (a) and (b)
(h) (c) and (d)
Answer: 7b.
arrow_forward
(1) what is an example of price discrimination that you have experienced ? is this price diesccrimination beneficial to consumers ? why yes or why no?
arrow_forward
Problem 1. (Monopoly and Efficiency)
A monopolist faces a market demand Q = 30- P, where P is the market price, and has a cost function TC = }Q²,
where Q is the quantity monopolist produces.
(a) Find the profit maximizing price and quantity. Calculate the resulting consumer surplus (CS), producer surplus
(PS) and the deadweight loss (DWL).
(b) Suppose that the government puts a price ceiling at p 18. How much output will the monopolist produce?
Calculate the resulting CS, PS, and DW L. Why is DWL different now?
(c) Suppose that the government puts a price ceiling on the monopolist in order to maximize the total surplus
(CS+ PS). What price ceiling should it choose? How much output will the monopolist produce at this price
ceiling? Calculate resulting CS, PS, and DW L. Is this the socially optimal outcome?
arrow_forward
1. Which of the following statements regarding price discrimination is false?
In order to capture more surplus, the firm must have some market power.
The firm must have some information about the different amounts people will
pay for the product.
The firm must be able to prevent resale.
The firm must be able accurately forecast total sales.
arrow_forward
7. Price discrimination and welfare
Suppose Barefeet is a monopolist that produces and sells Ooh boots, an amazingly trendy brand with no close substitutes. The following graph shows the market demand and marginal revenue (MR) curves Barefeet faces, as well as its marginal cost (MC), which is constant at $40 per pair of Ooh boots. For simplicity, assume that fixed costs are equal to zero; this, combined with the fact that Barefeet's marginal cost is constant, means that its marginal cost curve is also equal to the average total cost (ATC) curve.
First, suppose that Barefeet cannot price discriminate. That is, it must charge each consumer the same price for Ooh boots regardless of the consumer's willingness and ability to pay.
On the following graph, use the black point (plus symbol) to indicate the profit-maximizing price and quantity. Next, use the purple points (diamond symbol) to shade the profit, the green points (triangle symbol) to shade the consumer surplus, and the…
arrow_forward
7. Price discrimination and welfare
Suppose Barefeet is a monopolist that produces and sells Ooh boots, an amazingly trendy brand with no close substitutes. The following graph shows the market demand and marginal revenue (MR) curves Barefeet faces, as well as its marginal cost (MC), which is constant at $40 per pair of Ooh boots. For simplicity, assume that fixed costs are equal to zero; this, combined with the fact that Barefeet's marginal cost is constant, means that its marginal cost curve is also equal to the average total cost (ATC) curve.
First, suppose that Barefeet cannot price discriminate. That is, it must charge each consumer the same price for Ooh boots regardless of the consumer's willingness and ability to pay.
On the following graph, use the black point (plus symbol) to indicate the profit-maximizing price and quantity. Next, use the purple points (diamond symbol) to shade the profit, the green points (triangle symbol) to shade the consumer surplus, and the…
arrow_forward
7. Price discrimination and welfare
Suppose Clomper's is a monopolist that manufactures and sells Stompers, an extremely trendy shoe brand with no close substitutes. The following
graph shows the market demand and marginal revenue (MR) curves Clomper's faces, as well as its marginal cost (MC), which is constant at $20 per
pair of Stompers. For simplicity, assume that fixed costs are equal to zero; this, combined with the fact that Clomper's marginal cost is constant,
means that its marginal cost curve is also equal to the average total cost (ATC) curve.
First, suppose that Clomper's cannot price discriminate. That is, it must charge each consumer the same price for Stompers regardless of the
consumer's willingness and ability to pay.
On the following graph, use the black point (plus symbol) to indicate the profit-maximizing price and quantity. Next, use the purple points (diamond
symbol) to shade the profit, the green points (triangle symbol) to shade the consumer surplus, and the…
arrow_forward
7. Price discrimination and welfare
Suppose Clomper's is a monopolist that manufactures and sells Stompers, an extremely trendy shoe brand with no close substitutes. The
following graph shows the market demand and marginal revenue (MR) curves Clomper's faces, as well as its marginal cost (MC), which is
constant at $30 per pair of Stompers. For simplicity, assume that fixed costs are equal to zero; this, combined with the fact that Clomper's
marginal cost is constant, means that its marginal cost curve is also equal to the average total cost (ATC) curve.
First, suppose that Clomper's cannot price discriminate. That is, it must charge each consumer the same price for Stompers regardless of the
consumer's willingness and ability to pay.
On the following graph, use the black point (plus symbol) to indicate the profit-maximizing price and quantity. Next, use the purple points
(diamond symbol) to shade the profit, the green points (triangle symbol) to shade the consumer surplus, and the…
arrow_forward
10) Many restaurants offer "early-bird specials" to dinner customers. These specials consist of a significant price reduction on selected menu items purchased before some pre-determined time, e.g., 6 p.m. Is such a practice a form of price discrimination? If so, what type?
arrow_forward
Help
arrow_forward
1. Economic theory suggests that the consumer prejudice explanation for discrimination means that consumers will have to pay more to be served by employees of a specific group.
Group of answer choices
True
False
2. Celebrity endorsements are often used by monopolistically competitive firms to boost the reputation of the product that is being endorsed.
Group of answer choices
True
False
3. If a monopolist is producing at that output where price equals average variable cost in the short run, then it is earning a negative profit.
Group of answer choices
True
False
arrow_forward
True/False
1. Monopoly with perfect price discrimination will reach profit equals consumer surplus
of perfect competition market plus profit of perfect competition market, whether in
short run or long run.
2. Perfect price discrimination can reduce economic welfare because output decreases
beyond that which would result under monopoly pricing.
3. The inefficiency associated with monopoly is due to overproduction of the good.
arrow_forward
please answer in text form and in proper format answer with must explanation , calculation for each part and steps clearly
arrow_forward
8. Provide an explanation to the following statements about monopolies.
(a) The marginal revues decrease with q;.
(b) The monopolist is a price maker.
(c) The optimal price for the monopolist is greater than in perfect competition.
(d) The optimal production level for the monopolist is lower than in perfect competition.
(e) The resource allocation is inefficient.
(f) When n E [1,2), there will be a natural monopoly.
arrow_forward
True or False:
(D). A monopoly earns total revenue of $5000 when it sells 500 units of output and total
revenue of $5400 when it sells 600 units of output. Thus, the marginal revenue of the
600th unit is $9.
(E). We call a market where there is only one buyer for a good or service a monopoly.
(F). There are a few firms selling differentiated products in a monopolistically competitive
industry.
(G). When a demand curve is a downward sloping straight line, the slope of the marginal
revenue curve is twice as steep as the demand curve.
arrow_forward
15.
Which of the following is not true of successful price discriminators?
a. They could make greater profits by charging everyone a higher, uniform price.
b. Their customers must differ in their willingness to pay.
C.
Their customers must have difficulty reselling the good to other customers.
d. They must have monopoly power.
arrow_forward
1. Problems and Applications Q1
A publisher faces the following demand schedule for the next novel from one of its popular authors.
Price Quantity Demanded
(Dollars) (Copies)
100 0
90 100,000
80 200,000
70 300,000
60 400,000
50 500,000
40 600,000
30 700,000
20 800,000
10 900,000
0 1,000,000
The author is paid $2 million to write the novel, and the marginal cost of publishing the novel is a constant $10 per copy.
arrow_forward
7. Price discrimination and welfare
Suppose Barefeet is a monopolist that produces and sells Ooh boots, an amazingly trendy brand with no close substitutes. The following graph shows
the market demand and marginal revenue (MR) curves Barefeet faces, as well as its marginal cost (MC), which is constant at $30 per pair of Ooh
boots. For simplicity, assume that foxed costs are equal to zero; this, combined with the fact that Barefeet's marginal cost is constant, means that its
marginal cost curve is also equal to the average total cost (ATC) curve.
First, suppose that Barefeet cannot price discriminate. That is, it must charge each consumer the same price for Ooh boots regardless of the
consumer's willingness and ability to pay.
On the following graph, use the black point (plus symbol) to indicate the profit-maximizing price and quantity. Next, use the purple points (diamond
symbol) to shade the profit, the green points (triangle symbol) to shade the consumer surplus, and the black points…
arrow_forward
Q)
Perfect price discrimination transfers the gains from trade from ________ to ________.
Option.
a. producers; consumers
b. society; consumers
c. society; producers
d. producers; society
e. consumers; producers
Correctly explain with detail analysis
arrow_forward
MIcro:
The company “Mike Broonie” operates in the market of monopolistic competition. Just now, the company weekly produces and sells 100 units of pillows for £12 each. The average total cost to produce the pillows doesn’t depend on the output, being £10 per unit. Having evaluated the price elasticity of demand for its product, the company concluded that demand is inelastic at the moment.
a. What indicator characterizes the price elasticity of demand? What formula (or formulas) one can use to calculate this indicator? Choose any number for this indicator that, under the conditions specified in the case, could characterize the price elasticity of demand for the company “Mike Broonie”.
b. Imagine that the owner of the company wants to increase the price of the company’s product. How will it affect sales, revenue, and profit (will each of these indicators increase, decrease, or remain the same)? Give here theoretically substantiated forecast. To increase the number of points…
arrow_forward
5. State true or false and explain why.
(a) The monopolist maximizes profit at P=MC=MR=AR.
(b) A firm in perfect competition cannot practice price discrimination
arrow_forward
first options: increases or decreases
second options: $8,000 $2,000 $6,000
Note:-
Do not provide handwritten solution. Maintain accuracy and quality in your answer.
Take care of plagiarism.
Answer completely.
You will get up vote for sure.
arrow_forward
Q4) Pricing in practice are influenced by the following, except
a.
customer demand
b.
competitor's action
c.
predatory pricing
d.
discretionary pricing
arrow_forward
SEE MORE QUESTIONS
Recommended textbooks for you
Related Questions
- 2. Monopoly, Practice Question Firm P is a monopolist for a new drug that makes people feel thinner. the total cost function is C(Q) = 200 + 10Q + Q² The inverse demand function is p(Q) = 82 - Q (a) By how much do revenues increase if this firm sells one more (small) unit of output? By how much does its cost go up if it produces one more (small) unit of output? (b) What is the optimal price and quantity the monopolist should charge and sell? (c) What is the profit the monopolist makes? Should the firm shut down in the short or long run? (d) If the company increases its price by a small fraction (let us say 1%), by what proportion does demand go down? [Round to two decimal places.] (e) What percentage of the price is due to costs and what is due to markup? [Round to two decimal places.] (f) What is the deadweight loss of the monopoly pricing compared to competitive prices?arrow_forward8. You are an owner of a local Toyota dealership. Your dealership earned record profits of 13 million. In your market, you compete against two other dealers, and the market-level price elasticity of demand for Toyota cars is -1.5. The marginal cost of a car is 120000. What price should you charge for a Toyota car if you expect to maintain your profits?arrow_forward7. If a firm practices first-degree price discrimination, the firm must: (a) have customers with identical demand curves. (b) have complete information about each customer's unique demand curve before the customer buys the product. (c) be able to identify each customer's demand curve after the customer buys the product. (d) lack market power but know how its customers differ by their willingness to pay for the product. (e) (b) and (d) (f) (a) and (c) (g) (a) and (b) (h) (c) and (d) Answer: 7b.arrow_forward
- (1) what is an example of price discrimination that you have experienced ? is this price diesccrimination beneficial to consumers ? why yes or why no?arrow_forwardProblem 1. (Monopoly and Efficiency) A monopolist faces a market demand Q = 30- P, where P is the market price, and has a cost function TC = }Q², where Q is the quantity monopolist produces. (a) Find the profit maximizing price and quantity. Calculate the resulting consumer surplus (CS), producer surplus (PS) and the deadweight loss (DWL). (b) Suppose that the government puts a price ceiling at p 18. How much output will the monopolist produce? Calculate the resulting CS, PS, and DW L. Why is DWL different now? (c) Suppose that the government puts a price ceiling on the monopolist in order to maximize the total surplus (CS+ PS). What price ceiling should it choose? How much output will the monopolist produce at this price ceiling? Calculate resulting CS, PS, and DW L. Is this the socially optimal outcome?arrow_forward1. Which of the following statements regarding price discrimination is false? In order to capture more surplus, the firm must have some market power. The firm must have some information about the different amounts people will pay for the product. The firm must be able to prevent resale. The firm must be able accurately forecast total sales.arrow_forward
- 7. Price discrimination and welfare Suppose Barefeet is a monopolist that produces and sells Ooh boots, an amazingly trendy brand with no close substitutes. The following graph shows the market demand and marginal revenue (MR) curves Barefeet faces, as well as its marginal cost (MC), which is constant at $40 per pair of Ooh boots. For simplicity, assume that fixed costs are equal to zero; this, combined with the fact that Barefeet's marginal cost is constant, means that its marginal cost curve is also equal to the average total cost (ATC) curve. First, suppose that Barefeet cannot price discriminate. That is, it must charge each consumer the same price for Ooh boots regardless of the consumer's willingness and ability to pay. On the following graph, use the black point (plus symbol) to indicate the profit-maximizing price and quantity. Next, use the purple points (diamond symbol) to shade the profit, the green points (triangle symbol) to shade the consumer surplus, and the…arrow_forward7. Price discrimination and welfare Suppose Barefeet is a monopolist that produces and sells Ooh boots, an amazingly trendy brand with no close substitutes. The following graph shows the market demand and marginal revenue (MR) curves Barefeet faces, as well as its marginal cost (MC), which is constant at $40 per pair of Ooh boots. For simplicity, assume that fixed costs are equal to zero; this, combined with the fact that Barefeet's marginal cost is constant, means that its marginal cost curve is also equal to the average total cost (ATC) curve. First, suppose that Barefeet cannot price discriminate. That is, it must charge each consumer the same price for Ooh boots regardless of the consumer's willingness and ability to pay. On the following graph, use the black point (plus symbol) to indicate the profit-maximizing price and quantity. Next, use the purple points (diamond symbol) to shade the profit, the green points (triangle symbol) to shade the consumer surplus, and the…arrow_forward7. Price discrimination and welfare Suppose Clomper's is a monopolist that manufactures and sells Stompers, an extremely trendy shoe brand with no close substitutes. The following graph shows the market demand and marginal revenue (MR) curves Clomper's faces, as well as its marginal cost (MC), which is constant at $20 per pair of Stompers. For simplicity, assume that fixed costs are equal to zero; this, combined with the fact that Clomper's marginal cost is constant, means that its marginal cost curve is also equal to the average total cost (ATC) curve. First, suppose that Clomper's cannot price discriminate. That is, it must charge each consumer the same price for Stompers regardless of the consumer's willingness and ability to pay. On the following graph, use the black point (plus symbol) to indicate the profit-maximizing price and quantity. Next, use the purple points (diamond symbol) to shade the profit, the green points (triangle symbol) to shade the consumer surplus, and the…arrow_forward
- 7. Price discrimination and welfare Suppose Clomper's is a monopolist that manufactures and sells Stompers, an extremely trendy shoe brand with no close substitutes. The following graph shows the market demand and marginal revenue (MR) curves Clomper's faces, as well as its marginal cost (MC), which is constant at $30 per pair of Stompers. For simplicity, assume that fixed costs are equal to zero; this, combined with the fact that Clomper's marginal cost is constant, means that its marginal cost curve is also equal to the average total cost (ATC) curve. First, suppose that Clomper's cannot price discriminate. That is, it must charge each consumer the same price for Stompers regardless of the consumer's willingness and ability to pay. On the following graph, use the black point (plus symbol) to indicate the profit-maximizing price and quantity. Next, use the purple points (diamond symbol) to shade the profit, the green points (triangle symbol) to shade the consumer surplus, and the…arrow_forward10) Many restaurants offer "early-bird specials" to dinner customers. These specials consist of a significant price reduction on selected menu items purchased before some pre-determined time, e.g., 6 p.m. Is such a practice a form of price discrimination? If so, what type?arrow_forwardHelparrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you