NAME _____________________________________     Fall 2006

Economics 331: Intermediate Microeconomics Dr. R. Horn

Problem Set: Pricing with Market Power

 

1. Sal's satellite company broadcasts TV to subscribers in New York (1) and Los Angeles (2). The demand functions for each are:

Q1 = 50 - 1/3 P1 and Q2 = 80 - 2/3 P2

where Q is in thousands of subscriptions per year and P is the subscription price per year. The cost of providing Q units of service is:

C = 1000 + 30 Q [ where Q = Q1 + Q2]

a. Set up the revenue functions for each of the two markets. Write out the total profits function.

b. Determine the profit maximizing prices and quantities for 

the New York and Los Angeles markets. What are Sal's total profits?

c. What is the price elasticity of demand in each of the two markets?

 

  1. Assume a firm has determined its demand function to be:

P = 100 – 2 Q. Marginal costs are constant at 10 per unit of output (ignore fixed costs).
  1. Determine the single price monopoly price and profit maximizing level of output and profits.

  b. Assume the firm is able to practice first degree price        discrimination. Determine output, revenues and profits.

  1. Assess the amount of consumer surplus lost as a result of first degree price discrimination.

  d.Draw a reasonably accurate diagram showing your answers to parts a, b, and c.