Module 5 Tutorial
Q1 Price Discrimination
A small school has 100 students. You have been commissioned school photographer. From experience, you know that parents’ demand for copies of each child’s photograph is as given in the table below. Your fixed costs (studio rent, depreciation and various overheads) amount to $500 per week. Your variable costs (chemicals, films etc.) work out to a constant average variable cost of $1.50 per copy.
Price ($/copy)
Quantity Demanded
10
1
8
2
6
3
4
4
2
5
1
6
Suppose that you want to charge a uniform price per copy (i.e. be a single price monopoly).
How much will you charge to maximise your profit? How many copies will you sell?
What is your total revenue?
What is your profit during the week?
How much is the parents’ consumer surplus?
Suppose that you decide to practice perfect price discrimination. This is feasible as your product has no value to people other than the original buyer.
What is your profit maximising number of copies per child?
How much will you charge for the first copy? The second copy? Each successive copy?
What is your total revenue?
What is your profit for the week?
How much is the parents’ consumer surplus
Q2 Single-price Monopoly
Danny’s Donut is a single-price monopoly. The table (below) shows the market demand for Danny’s donuts.
Price ($ per donut)
Qd (donuts per hour)
MR ($ per hour)
4.5
0
4.0
1
3.5
2
3.0
3
2.5
4
2.0
5
1.5
6
Calculate the marginal revenue schedule.
Suppose the marginal cost of donut is $1. Determine the profit-maximising output and price.
Given the fixed cost at $1.8, calculate Danny’s profit.
Does Danny’s Donut use resources efficiently? Explain your answer.
Q3 Perfect Competition vs Monopoly
A small town is served by many competing supermarkets, which have constant marginal cost.
Using a diagram of the market for groceries, show the consumer surplus, producer surplus and total surplus.
Now suppose that the independent supermarkets combine to form one chain. Using a new diagram, show the new consumer surplus, producer surplus and total surplus. Relative to the competitive market, what is the transfer from consumers to producers? What is the deadweight loss?
Q4 MR in Monopoly
Why is marginal revenue (MR) the same as price in perfect competition?
Why is marginal revenue (MR) below price in monopoly?
Q5 A Loss-making Monopoly
(a) National Australia Bank (NAB) has a branch in a small town in Queensland; it is the only bank in this town. In the past it was breaking even. But recently due to migration of population into bigger cities, the demand for banking services has gone down. This branch is now making losses. Sketch a clearly labelled diagram to illustrate this change.
(b) How does technological advancement affect the price and output of a competitive market? Consider a competitive market. In the process of technological change, why do we observe that some firms keep on using the old technology and suffer economic losses?
The post Module 5 Tutorial Q1 Price Discrimination A small school has 100 students. appeared first on PapersSpot.
