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Microeconomics Problem Set Solutions

This document contains 7 questions and their solutions related to microeconomics concepts like profit maximization, Cournot competition, price discrimination, two-part pricing, and monopoly pricing. Question 1 calculates the profit-maximizing price for a firm facing a demand elasticity of -5. Question 2 finds the equilibrium price in a Cournot industry with 8 firms and market elasticity of -6. Question 3 determines the optimal prices under third-degree price discrimination for a monopoly facing different elasticities for two consumer groups. The remaining questions solve problems involving two-part pricing strategies, consumer surplus extraction, and comparing profits from different pricing approaches.

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7 views4 pages

Microeconomics Problem Set Solutions

This document contains 7 questions and their solutions related to microeconomics concepts like profit maximization, Cournot competition, price discrimination, two-part pricing, and monopoly pricing. Question 1 calculates the profit-maximizing price for a firm facing a demand elasticity of -5. Question 2 finds the equilibrium price in a Cournot industry with 8 firms and market elasticity of -6. Question 3 determines the optimal prices under third-degree price discrimination for a monopoly facing different elasticities for two consumer groups. The remaining questions solve problems involving two-part pricing strategies, consumer surplus extraction, and comparing profits from different pricing approaches.

Uploaded by

darknight_killa
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Microeconomics for Managers

Problem Set 11
Sherif Khalifa

Question 1
The manager of a firm purchase inputs at a price of $1.75. The elasticity of demand is
given by -5. What price should the manager charge to maximize profits?

EF
1 + EF

5
= 1.25
15

= (1.25) M C
= (1.25) (1.75) = 2.1875

Question 2
Suppose 8 firms compete in a Cournot industry. The market elasticity of demand for
the product is -6, and each firms marginal cost of production is $75. What is the profit
maximizing equilibrium price?

N EM
=
MC
1 + N EM

8 (6)
=
75 = (1.021276596) (75) = 76.6
1 + 8 (6)

Question 3
You are the manager of a monopoly that sells a product to two groups of consumers.
Group 1s elasticity of demand is -3, while group 2s is -7. Your marginal cost of producing

the product is $15. Determine your optimal markups and prices under third degree price
discrimination?

1 + E1
= MC
E1

13
P1
= 15
3

3
P1 = 15
= 22.5
2

P1

1 + E2
= MC
P2
E2

17
P2
= 15
7

7
P2 = 15
= 17.5
6

Question 4
Suppose the demand function is given by

Q = 100 2P
If this demand function is based on the individual demands of 10 customers. The marginal
cost to the firm is given by $5. What is the optimal two part pricing strategy?

Q = 100 2P
= 100 2 (5) = 90

Consumer Surplus =

1
(90) (50 5) = 2025
2

The optimal fixed fee is the consumer surplus enjoyed by an individual consumer=202.5. Thus, the
optimal two part pricing strategy is for the firm to charge an initial fee to each customer of 202.5 and a
per unit price of $5.

Question 5
Suppose a consumers inverse demand function for soda produced by a firm with market

power is given by

P = 20 2Q
The marginal cost is zero. What price should the firm charge for a package containing 10
cans of soda?
When Q=10, P=0, and when Q=0, P=20. Thus, the total valuation to the consumer of 10 pieces is

T otal V aluation =

1
(10) (20 0) = 100
2

The firm extracts all this surplus by charging a price of $100 for a package of 10 cans of soda.

Question 6
Suppose three purchasers of a new car have the following valuations for dierent options

Consumer

AC

Power Brakes

$1100

$500

$800

$300

If the manager knows the identity of each customer, what is the optimal pricing strategy?
The manager maximizes profits through price discrimination: charge consumer 1: $1600 for an AC and
power brakes, and charge consumer 2: $1100 for an AC and power brakes.
If the manager does not know the identity of the buyers, what is the optimal pricing
strategy?
If the manager charges $1100 for the bundle, both consumers will buy the option package.

Question 7
You are the manager of a monopoly. A typical consumers inverse demand function for
your firms product is given by

P = 100 20Q
Your cost function is

C (Q) = 20Q

Determine the optimal two part pricing strategy?

Consumer Surplus =

1
(4) (100 20) = 160
2

Charge a fixed fee of $160 and a per unit charge equals to marginal cost=$20.
How much additional profits do you earn using a two part pricing strategy compared with
charging this consumer a per unit price?

MR

= MC

100 40Q = 20 Q = 2

P = 100 20 (2) = 60

P rof its = 120 40 = 80


The profits with two part pricing is 160, while charging a per unit price is 80.

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