Changing Space of Indian Banking

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S) 2.3 T) 4.0 U) 6.4 V) 7.0 W) none of the above

Answers to Questions Above

- For TV stations, P = 80 - .01Q. Under third-degree price discrimination, MR = 80 – .02Q and MC = 4, so 80 – .02Q = 4 or Q = 3,800, so P = $42. The correct answer is (S).

- For individual consumers P = 60 – .01Q. Under third-degree price discrimination, MR = 60 – .02Q and MC = 4, so 60 – .02Q = 4 or Q = 2,800, so P = $32. The correct answer is (N).

- If the markets for TV stations and individual consumers are combined, we must add them across the quantity dimension. In other words, we have: Q1 = 8000 - 100P1

Q2 = 6000 – 100P2

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Q = 14000 – 200P or P = 70 - .005Q. Therefore, MR = 70 - .01Q and MC = 4, so 70 - .01Q = 4, or Q = 6,600 and P = $37. The correct answer is (P).

- We must calculate the profits under price discrimination and under a single monopoly price and compare the totals. Under price discrimination, total profit is (42 x 3800) + (32 x 2800) – (4 x 6600) – 20,000 = $202,800. With a single price, profit is (37 x 6600) – (4 x 6600) – 20,000 = $197,800. In other words, profits have fallen by $5,000. The correct answer is (D).

- For the TV stations, consumer surplus under price discrimination is (80 – 42) x 3800/2 = $72,200. Consumer surplus under a single price monopoly is (80 - 37) x 4300/2 = $92,450. There is a gain of consumer surplus of $20,250. The correct answer is (Y). By the way, for individual consumers, consumer surplus under price discrimination is (60 – 32) x 2800/2 = $39,200. Consumer surplus under a single price monopoly is (60 - 37) x 2300/2 = $26,450. There is a loss of consumer surplus of $12,750.

- We know that MR = P(1 + [1/ED]) and we know that firms that charge a single price will profit-maximize by setting MR = MC. If the monopolist is engaging in third-degree price discrimination MR in the first market and MR in the second market are equal. So, in the first market, 20 = P(1 – [4/5]), so P = 100. In the second market, 20 = P(1 – [1/5]), so P = 25. The ratio of the price charged in the first market to that charged in the second market is 100/25 = 4/1. The correct answer is (T).

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Questions with No Solutions Provided:

7-11. A monopoly producer of widgets sells these widgets in Canada and in China. Strict trade laws prevent consumers from re-selling their widgets from one market to another. You are given the following demand curves per year for these distinct markets:

Canada: P1 = 1900 – 0.75Q1

China: P2 = 900 – 0.25Q2

where P refers to prices charged in each market and Q refers to quantities demanded in each market. The variable cost of producing widgets is uniform at $100 per widget. In addition there are fixed costs of $500,000 per year. Questions 7 through 11 concern this case.

7. If the producer of widgets can price discriminate by charging different prices in each market, the profit-maximizing price charged in Market #1 (Canada) will be:

A) $0 B) $5 C) $10 D) $20 E) $40 F) $50

G) $100 H) $150 I) $180 J) $200 K) $300 L) $400

M) $450 N) $500 O) $550 P) $600 Q) $700 R) $750

S) $800 T) $850 U) $900 V) $950 W) $1000 X) $1100

Y) $1200 Z) none of the above

8. If the producer of widgets can price discriminate by charging different prices in each market, the profit-maximizing price charged in Market #2 (China) will be:

A) $0 B) $5 C) $10 D) $20 E) $40 F) $50

G) $100 H) $150 I) $180 J) $200 K) $300 L) $400

M) $450 N) $500 O) $550 P) $600 Q) $700 R) $750

S) $800 T) $850 U) $900 V) $950 W) $1000 X) $1100

Y) $1200 Z) none of the above

9. Assume now that the producer of widgets is unable to discriminate between markets but must sell at a uniform price. By how much will profits fall as a result of this?

A) $0 B) $5000 C) $10000 D) $20000 E) $40000 F) $50000

G) $75000 H) $90000 I) $100,000 J) $125,000 K) $145,000 L) $235,000

M) $250,000 N) $300,000 O) $400,000 P) $500,000 Q) $620,000 R) $750,000

S) $840,000 T) $880,000 U) $900,000 V) $960,000 W) $1 million

X) $1.2million Y) $1.4million Z) none of the above

- For the consumers in market #1 (Canada), by how much has consumer surplus fallen (-) or risen (+) in moving from the price discrimination situation to the normal monopoly situation with no price discrimination?

A) -$294,050 B) -$192,050 C) -$168,750 D) -$140,800

E) -$120,750 F) $0 G) +$5000 H) +$100,000

I) +$120,500 J) +$162,750 K) +$224,250 L) +$360,800

M) +$400,500 N) +$430,500 O) +$472,750 P) +$484,000

Q) +$500,450 R) +$543,750 S) +$600,700 T) +$650,850

U)