ECO 503 Problem Set 6
1. A monopolist operates in an industry where the demand function is given by q = 1000 − 20p. The monopolist’s constant
marginal cost is c = 8. What is the monopolist’s profit-maximizing price?
2. The Grand Bengal Hotel is the only hotel at Fox’s Bazar, and serves customers all year round. During the summer, it faces
the demand given by p = a1 − bq, and during winter it faces p = a2 − bq, where a2 > a1 > 0. Assume it has a constant
marginal cost c throughout the year. Will the hotel charge a higher price in the summer or in the winter?
3. Now suppose Abdul’s Boat Rentals is the only such store at Fox’s Bazar, and it faces a demand of p = a − b1 q during
the summer, and demand p = a − b2 q during the winter, where b2 > b1 > 0. Assume it has a constant marginal cost c
throughout the year. Will the store charge a higher price in the summer or in the winter?
4. A monopolist faces demand p = 210 − 4q and initially has constant marginal cost c = 10.
(a) Find the monopoly price and monopoly profit.
(b) Now suppose marginal cost goes up to c = 50. What happens to the monopoly price and profit?
5. Suppose a monopolist faces demand D (p) = 120 − 2p and has constant marginal cost c = 40. Compute consumer surplus,
profit, total surplus and deadweight loss in the two cases: (i) single-price monopolist; (ii) perfect (first degree) price
discrimination.
6. (Due to Luis Cabral) In 1999, Coca-Cola announced that it was developing a “smart” vending machine, such machines
can charge different prices based on the outside temperature in a given day. Suppose, for simplicity, there are only “High
temperature” days and “Low temperature” days, with a 50% probability for any given day to be of either type. Suppose
on high temperature days, the daily demand is QH = 280 − 2p, where QH is the number of cans sold and p is the price
of a can of coke. On low temperature days, the daily demand is QL = 160 − 2p. The marginal cost of a can of coke is a
constant c = 20.
(a) Suppose Coca-Cola has installed smart vending machines, and can charge different prices pH and pL on hot and cold
days. What prices should Coca-Cola charge on each type of day?
(b) Now suppose Coca-Cola can only use its normal vending machines, and has to charge the same price p on both types
of days. Assuming Coca-Cola is risk-neutral (meaning they maximize expected profit), what is the optimal price for
a can of coke in this case?
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(c) What are Coca-Cola’s profits under constant and weather-dependent prices? How much would Coca-Cola be willing
to pay per day in order to have smart vending machines?
7. A local store that sells cans of Coca-cola has the following daily profit function for selling cans of Coca-cola:
π (p, T ) = 100p + 10pT − p2
where p is the price (in Taka) the store chooses for each can of Coca-cola, and T is the average temperature (in degrees
Celsius) during the day. Find the profit-maximizing pricing strategy for the store. What is the optimal price on a 30
degrees Celsius day? What is the optimal price if instead T = 40?
8. Suppose a monopolist faces demand D (p) = 120 − 2p and has constant marginal cost c = 40. Compute consumer surplus,
profit, total surplus and deadweight loss in the two cases: (i) single-price monopolist; (ii) perfect (first degree) price
discrimination.
9. (Due to Luis Cabral) In 1999, Coca-Cola announced that it was developing a “smart” vending machine, such machines
can charge different prices based on the outside temperature in a given day. Suppose, for simplicity, there are only “High
temperature” days and “Low temperature” days, with a 50% probability for any given day to be of either type. Suppose
on high temperature days, the daily demand is QH = 280 − 2p, where QH is the number of cans sold and p is the price
of a can of coke. On low temperature days, the daily demand is QL = 160 − 2p. The marginal cost of a can of coke is a
constant c = 20.
(a) Suppose Coca-Cola has installed smart vending machines, and can charge different prices on hot and cold days. What
prices should Coca-Cola charge on each type of day?
(b) Now suppose Coca-Cola can only use its normal vending machines, and has to charge the same price on both types
of days. Assuming Coca-Cola is risk-neutral (meaning they maximize expected profit), what is the optimal price for
a can of coke in this case?
(c) What are Coca-Cola’s profits under constant and weather-dependent prices? How much would Coca-Cola be willing
to pay per day in order to have smart vending machines?