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Lecture 10

Economics 2151B - Lecture 10.docx

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Department
Economics
Course
Economics 2150A/B
Professor
Kristin Denniston
Semester
Winter

Description
Economics 2151B Wednesday February 5 Lecture 10 Midterm • Monday Feb. 10 Homework #2 • Extended to Thursday at NOON Problem 12.20 • 3 degree • No capacity constraint • Bargain travellers: Q 1 400 – 2P 1 • High end travellers: Q 2 500 – P 2 • MC = $20/hotel room a) Market Demand – horizontal summation (sum quantities, not prices) Q + Q 1 2 Q = Q +1Q = 200 – 2P + 501 – P 2 Q = 900 – 3P (Demand) b) Uniform Price P = 300 – 1/3Q (Inverse Demand) MR = 300 – 2/3Q MR = MC 300 – 2/3Q = 10 Q = 420 P = 300 – 1/3(420) = 160 At P = 160… Bargain: Q =140 – 2(160) = 80 High end: Q =2500 – 160 = 340 Therefore the high end customers will buy more hotel rooms at the price of $160. We would want to offer a lower price to bring the bargain customers into the market. rd c) 3 Degree Price Discrimination Set MR = MC in each market Bargain: P =1200 – 1/2Q 1 MR 1 200 – Q 1 Set MR =1MC 200 – Q 1 20 Q1= 180 P1= 200 – ½(180) = 110 We have lowered the price for the bargain group from $160 to $110. High end: P =2500 – Q 2 MR 2 500 – 2Q 2 MR 2 MC 500 – 2Q =220 Q = 240 2 P2= 240 + 20 = 260 d) Screening – a process for encouraging consumers to self-select on the basis of a characteristic that the consumer can observe and is strongly correlated with the characteristics that the firm wants to know and cannot observe (their willingness to pay for your product) • One way to screen out the bargain customers is to offer a senior discount or a student discount (you assume that old and young customers have fixed incomes and will not be willing to pay as much) • You can also offer a coupon or online discount – the more price sensitive customers will take time to find those coupons online rd Problem 12.23 – Constrained 3 degree problem Two equations: 1. MR 1 MR 2 2. Q1+ Q =2Q (capacity constraint) Elderly: Q 1 750 – 4P1 Young: Q = 850 – 2P2 2 MC = 40 Q1 + Q2 ≤ 500 *Make sure that you find marginal revenue after converting your demand to the inverse form So MR = 187.5 – 1/2Q 1 MR =2425 – Q 2 Two equations: 1. MR 1 MR  127.5 – 1/2Q = 425 1 Q 2 2. Q1 + Q2 = 500  Q + 1 = 502 *In 3 degree price discrimination problems, remember to look for a capacity constraint. Elderly P1= 187.5 – (1/4)(175) = $143.75 Young P =2425 – ½(325) = $262.5 Therefore you can charge the young group more money than the elderly to go on the cruise. Strategies for 3 Degree Price Discrimination 1. Forward Integration • In order to increase producer surplus, you want to charge more to the company with elastic demand and less to the company with inelastic demand. 2. Screening • You can use coupons or rebates to give price sensitive a lower price • Inter
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