ECON 465 Chapter : PS2 Solutions-2.doc

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9 Jan 2015

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We don"t know because we don"t know the cost of different pizzas. Chapter 5, #3 (a) the demand functions for the two consumer groups are. Next, consider (b) first consider the case when p . But this solution violates the assumption that p is less than 100, so is not viable. The maximum is then for the second case with no sales to group 2. Consumer surplus is obtained by using the first market only. Chapter 5, #4 (a) for the first market. Consumer surplus in the second market is given by: Consumer surplus in the first market is obtained from part (b) in problem 3, which is 3200. Total profits are then 6850 and total consumer surplus is 3425. (b) price discrimination has increased total surplus. This is because, without price discrimination, one market is not served. Now, equate marginal revenue for a cold day with marginal cost. Now, equate marginal revenue for a hot day with marginal cost.

Related Questions

Suppose the local zoo hires you to assist them in setting admission prices. The zoo's managers recognize that there are two distinct groups of consumers for zoo admission: adults (A) and children/senior citizens (CS). The demand and marginal revenue functions for the two groups are as follows:

P_A = 9.6 - 0.08Q_A MR_A = 9.6 - 0.16Q_A

P_CS = 4 - 0.05Q_CS MR_CS = 4 - 0.10Q_CS

Suppose the zoo is large enough so that crowding is not a problem at the zoo. The managers, therefore, consider the marginal cost to be zero. Answer the following questions:

A) If the zoo decides to price discriminate, what are the profit-maximizing price and quantity in each sub-market? Calculate the total revenue for each sub-market.

B) If the zoo decides not to price discriminate, it faces a combined demand and marginal revenue function of P = 6.15 - 0.03Q and MR = 6.15 - 0.06Q. What are the profit-maximizing price and quantity of admission if the zoo charges one admission price for all? Calculate the total revenue in this case.

C) Would you recommend charging one admission price for all or different prices for adult and children/senior citizens? Why do you make that recommendation?

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As we observed in this chapter, central banks, rather than purposefully setting the level of the money supply, usually set a target level for a short-term interest rate by standing ready to lend or borrow whatever money people wish to hold at that interest rate. (When people need more money for a reason other than a change in the interest rate, the money supply therefore expands, and it contracts when they wish to hold less.)

A. Describe the problems that might arise if a central bank sets monetary policy by holding the market interest rate constant. (First, consider the flexible-price case, and ask yourself if you can find a unique equilibrium price level when the central bank simply gives people all the money they wish to hold at the pegged interest rate. Then consider the sticky-price case.)

B. Does the situation change if the central bank raises the interest rate when prices are high, according to a formula such as R - R₀= a(P - P₀), where a is a positive constant and P₀a target price level?

C.Suppose the central bankâs policy rule is R - R₀= a(P - P₀) + u, where u is a random movement in the policy interest rate. In the overshooting model shown in Figure 15-12, describe how the economy would adjust to a permanent one-time unexpected fall in the random factor u, and say why. You can interpret the fall in u as an interest rate cut by the central bank, and therefore as an expansionary monetary action.

Consider demand for re-issued albums of the band Led Zeppelin. Suppose there are three consumers and 4 discs under consideration. The marginal cost is $1 per disc. The following chart gives each groupâs WTP for each disc:

	Led Zeppelin IV	Presence	How the West was Won (Live)	Led Zeppelin II
Group 1	20	0	10	5
Group 2	10	10	10	10
Group 3	10	2	20	3

If the firm charges a single per-disc price, what is the profit-maximizing price? What are firm profits if these are the only consumers?

If the firm issues a box set containing 3 of the albums, how much should it charge and which albums should be included in the box set? How much should it charge separately for the album it left out? What are firm profits in this case?

If the firm issues a box set containing ALL of the albums, how much should it charge? What are firm profits in this case?

ECON 465 Chapter : PS2 Solutions-2.doc

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