BEPP 250 Unit 2 Flashcards

Question

Excess demand

Answer 1

AD> AS this means the price is too low, as the downward sloping demand curve has a higher Q than the upward sloping supply curve for the given p. Upward pressure on prices results, discouraging consumers and attracting firms. P up, D down, S up

Answer 2

Now, price is too high. Consumers don’t demand as much as is being supplied. So downward pressure on prices, attracting consumers and discouraging firms. D goes up, S down, p down

Answer 3

Conjecture p is above .42, meaning we set Qs = Qd and Qs is 100p/ .0178 which equals Qd = 100(30-p) Solve for p, and we get .525 This is above .42, so conjecture is correct. If it weren’t correct, then we would shut down, supply 0 So, p*= .42 and plug into Qs or Qd to get Q* = 2948 Industry Profits = pq - NC(q*/N) Note: each firm supply q*/100, so do cost for each indiv and multiply by 100 to get total cost. Industry Profit = .525(2948) - 100C(29.48) To get per driver profit, divide this by N, 100in this ex.

Answer 4

If I choose too big of a q, I may drop the market price too low This means I can influence the market and the price can change based on how much I produce.

Answer 5

Firm is the only seller of a product with no close substitutes. Only alternative for consumers is not buying anything, no alternate product. No cross price elasticity. Effective control of market prices. Use the SSNIP test to measure market share, if above 70 percent, then monopoly.

Answer 6

Now, when firm considers output, q, thinks about how it will affect price. Price is a function of q now. For a price taker p’(q)= 0, as price stayed the same regardless. For market power firm, price can change, will decrease in q. Dp/dq is negative.

Answer 7

No longer just p Remember revenue = p*q =p(q) * q as p is function of q So, MR(q)= p(q) + p’(q) * q p is the gain from selling marginal unit but the rest is the loss from reducing price for all other units sold.

Answer 8

Say that you can sell 10 units at 2 dollars each but if sell one extra units, price is now only 1 dollar per unit. Before, make 20 dollars, now make only 11. Benefit is the extra dollar from the last unit, but lose money too. So, beneficial to charge higher price to make more money.

Answer 9

Profit max monopoly quantity solves: MR(qM)= MC(qM) So, p(qM) + p’(qM) * qM = MC(qM) Since p’ is negative, price is bigger than MC, not equal anymore. Firm with market power will produce less to keep prices high and max profit.

Answer 10

1. Invert demand function to get inverse demand function. This means getting p =... in terms of q Then multiply this by Q to get R(Q) and take derivative of this to get MR(q) NOTE, if linear inverse demand—> p= a-bq, then MR = a - 2bq 2. Equate MR and MC This will give you QM 3. Plug in optimal quantity into inverse demand to get optimal price. 4. Compute profits PM*QM - NC(qM) where qM = QM/N

Answer 11

If inverse demand is linear, p = a-bq So, MR(q)= a-2bq Double the slope Only if linear!

Answer 12

1. p = 30 - Q/100 Since linear, MR(Q) = 30 - Q/50 2. Set this equal to MC—> MC(Q) = .0178 Q/100 Solve for QM, we get 1487 miles 3. Plug into inverse demand —> pM = 30-QM/50 = 15.13 4. Profits. PMQM -100C(QM) 15.13(1487) - 100C(qM) = 21,301 Restrict output, charge higher price

Answer 13

Mon has higher p and lower q Consumer surplus goes down, producer surplus up with monopoly. But overall social surplus down. Deadweight loss P> MC for Mon This means the willingness to pay for the marginal unit is bigger than the cost of the marginal unit, so there is lost value. We stop production even though people value the good more than it costs to produce. But not worth it to maximize profit because would need to have cheaper price. Whereas they are equal for competitive markets.

Answer 14

Illegal to blantanly create a monopoly and abuse the power.

Answer 15

Minimizing AAC, when q bar = 0. So never shut down. P bar = 0

Answer 16

For p between 0 and 8, just firm 2. So, Qs =p/2 | For p bigger than 8, both firms. So, add them up. It is p.

Answer 17

Charging different prices to different people

Answer 18

Firms with perfect knowledge of individual valuations charge personalized prices. Perfect price discrimination Maximize total welfare, but consumers get zero surplus. unrealistic as firm wont know everyone’s WTP.

Answer 19

``` Firms offer different product quality / quantity so that consumers self select from menu of products. They choose, ex. Business class vs economy. Business more expensive. Welfare implications unclear ```

Answer 20

This is what we will focus on Firm sets different prices for exactly the same product in different markets based on observable characteristics Requires 1. The ability to determine which segment a consumer belongs to and 2. Ability to restrict resale. Instead of knowing WTP, can only group people in market segment and have different price for each segment. Based on where customer belongs, charge different price.

Answer 21

Consumers can be very price sensitive (stingy) or not very price sensitive. Elasticity measures how much quantity demanded changes when price is changed by a certain amount. E= (Dq/q) / (dp/p) = dq/dp * p/q Note we will have q in terms of p because of the demand function Also note that dq/dp is the deriv of q with respect to p. Will have only p’s in our answer Look at absolute value of E. Higher abs value is the more elastic one, lower value market. More elastic, lower price because they are more sensitive to change in price. Lower price means more price sensitive. Less elastic, higher price, as less price sensitive and will buy anyway. Higher price, less price sensitive. Lower prices to get more elastic buyer, but tradeoff because less margins on high value market. So, price discrimination.

Answer 22

Sell to both markets | Or only sell to high value, less elastic, market.

Answer 23

Selling to both: Good is that larger market since both markets But, in order to get to the low value market (stingy, more elastic),need to lower the price below what would originally optimally charge high value market. Selling to both is profitable if: Difference in elasticities between markets isn’t too big. Low value market isn’t too low value relative to high value market Or if low value market is much larger relative to high value market, so don’t want to lose out on a large number of buyers. Lower price gets more buyers, tradeoff because less margins on high value market. Need to decide if it is worth it

Answer 24

If before we sold to both markets, then price for high value consumers will go up and for low value consumers will go down. If before only sold to high value consumers, high value consumers price unchanged and set monopoly price for low value and sell positive quantities. Welfare implications: 1. Increases profits. However, no change if firm earns zero profits from low value market. 2. If optimal for firm to exclude some markets when restricted to a single price, then allowing pd will increase consumer surplus. No change if firm Chargers low value consumers’ WTP.

Answer 25

1. Aggregate demand function 2 profits under strategy of selling to both markets A. Inverse demand B. MR=MC C. Check p is in the right range so selling to both markets D. Profits. 3. Profits under selling to high value only A. What is high value? Less elastic (abs value lower) B. Info demand C. Mr = Mc D. Check p is valid in range D. Profits 4. Whichever is higher profit and get p and q in each case if can’t pd 5. Now can pd. Get the new profits, cs, and total welfare with pd and compare.

Answer 26

1. Aggregate demand. If p is bigger than 100, nether market demands, so Qd=0 If p is between 50 and 100, then just market 1, so Qd = 100-p If p is less than 50, then both markets. So, add up. Qd = 150-2p

Answer 27

Profits under strategy of selling to both markets. A. Inverse demand. Since both markets, Q = 150-2p so p = 75-q/2 B. MR = MC. Remember, linear inverse demand, so MR =75-q Mc = 0, so q = 75 C. Check p. P = 75-q/2 = 37.5 To sell to both markets, p less than 50. This is valid. D. Profits. PQ - total cost 37.5(75)-10 = 2802.5

Answer 28

Computer profits under just selling to high value market. First need to see which is high value market. Take the absolute value of the elasticities E1= dq/dp * p/q = -1(p/(100-p)) and E2 = -1(p/(100-p)) Absolute value, market 1 is smaller, less elastic, so higher value. Change in price doesn’t influence quantity demanded as much. A. Inverse demand. P = 100-q B. MR=MC, 100-2q =0,q =50 C. Check P. P =100-q = 50. This is valid. Note, if p had not been valid, then would just sell to both markets. D. Profits. 50(50)-10=2490

Answer 29

We got the profits and found that we have a higher profit when selling to both markets. So p =37.5 and plug into each demand function to get q1 = 62.5 and q2 = 12.5

Answer 30

We already got Prof without pd = 2802.5 ``` Profits with pd: 1. Market 1 we already optimized in step 3 and got a revenue of 2500 2. Optimize market 2 A. Inverse demand, p = 50-q B. Set mr = Mc, 50-2q = 0, q =25 C. Get p = 50-q=25 D. Revenue = pq = 25(25)=625 3. So profits = (625+2500)-10. Total revenue - cost ``` See next page for CS and total welfare

Answer 31

Difference between willingness to pay and actual price up until quantity produced. Area under inverse demand curve. ``` p= a-bq1 Cs1 = (a-PM)(q1M)/2, área of the CS triangle. ``` Can calculate before and after price discriminating for each market based on the price being charged. Will be same price, p, if can’t pd. If sell to both markets before, Consumer surplus for high value market down when can pd and will go up for low value If sell to only high value market before, cs for high value will stay same. For low value will increase (from 0) Will increase only if pricing not at exactly the WTP. If exactly WTP, then consumer surplus =0

Answer 32

Profit plus consumer surplus. We see that total welfare is lower with price discrimination when previously was optimal to sell to both markets. But will increase if before optimal only sell to high value market.