ASSIGNMENT 1
1. In each of the following decision situations, explain the trade-offs involved.
(a). You need to decide whether to buy a used or a new car.
Ans.
‘ If I decide to buy the old car, I will lose the opportunity to buy the new car, and vice versa. Further, old car will be cheaper, but will lead to ouflow of money for repairs whereas if I buy the new car it will be expensive but will need lesser outflow of money to maintain the car.
(b). You are thinking about opening a computer-services business in your basement.
Ans.
Trade-off faced by me to open computer-service business in the space in my basement which could be used for other purposes like renting or playing or storage.
(c). You are a consultant for the City of Toronto. The city council asks you to analyze the implications of a new high-rise office building downtown.
Ans.
Time is the most important trade-off in this case. If I allot time to analyze the implications of a new high-rise office building downtown, I will not be able to analyze other projects.
2. (a). Identify each of the following topics as being part of microeconomics or macroeconomics:
i. Factors influencing the demand for cell phones
Ans. Microeconomics
ii. The impact of tax policy on national saving
Ans.. Macroeconomics
iii. The effect of pollution taxes on the Canadian coal industry
Ans-. Microeconomics
iv. The degree of competition in the airline industry
Ans . Microeconomics
(b). Which of the following statements are positive, and which are normative? (4 marks)
i. The minimum wage rates should be decreased.
Ans Normative
ii. If the price of a product in a market decreases, other things being equal, quantity supplied will increase.
Ans . Positive
iii. A little bit of inflation is worse for society than a little bit of unemployment.
Ans . Normative
iv. The price of bonds is inversely related to the interest rate.
Ans Positive
3. Use the graph below to answer the questions that follow.
- What are the most efficient combinations of TVs and XBoxes?
Ans.a The most efficient combination of TVs and Xboxes is at Point C with highest number of TV as 35 and Xboxes at 28. The more efficient combination would have been 32 TV and Xboxes. However in the given situation point C is the most efficient combination.
- What is the opportunity cost of moving from point C to point D?
Ans b.
By moving from point c number of TV will increase to 55 from 35 i.e. 20 TVs and Xboxes will reduce to 8 from 28 i.e. 20 Xboxes, so opportunity cost for moving from point c to point b will be 20 Xboxes for 20 TVs i.e. 1 Xbox for each Extra TV.
c. If this economy puts all of its resources into the production of TVs, how many units could it produce?
Ans c.
Economy can produce a maximum of 60 TVs by employing all its resources into production of TVs.
d. Is the production of TV and Xbox at point F efficient? Explain.
Ans d.
No the production of TV and Xbox is not efficient at point as it is unable to utilise its available resources optimally. At point F the resources available for production would be underutilised.
4. Use the graph below to answer the questions that follow. Be sure to show your calculations.
- What would the equilibrium price and quantity be?
Ans a.
The point of intersection of demand and supply curve is equilibrium. Hence Point E is Equilibrium.
- Suppose the price is currently at $4. What problem would exist in the economy? What would you expect to happen to price? Explain your answer.
Ans.b.
At Price= $4, Demand of the goods is 20 units and but supply is 4 Units. With the goods in high demand and low supply prices are expected to increase upto the price at which demand equals supply. Hence prices are likely to increase.
- Suppose the price is currently $12. What problem exists in the economy? What would you expect to happen to price? Explain your answer.
Ans.c.
At price= $12, Demand of the goods is 4 units and supply is 20 units. The price at which demand is low and supply is high, prices are likely to reduce up to the price at which demand and supply equals each other. Hence Prices are likely to fall.
- What is the slope of the demand curve between point E and point C?
Ans d.
Slope of demand curve= Change in quantity demanded/ Change in price
Change in quantity demanded= (20-4)/4= 16/4= 4
Change in price= (4-4)/4= 0
Slope = 0.
- Using the midpoint method, calculate the elasticity of demand if price changes from $12 to $8. Is this elastic or inelastic?
And-e. Elasticity= % Change in quantity demanded/ % Change in price
= ((4-12)/4)/((8-12)/12)
= 6
Demand is elastic.
- Using the midpoint method, calculate the elasticity of supply if price changes from $8 to $12. Is this elastic or inelastic?
Ans f. Elasticity= % Change in quantity Supplied / % Change in price
= ((20-12)/12)/((12-8)/8)
= 1.33
Supply is elastic.
- Explain the effect a $12 price floor would have on this market. Would this be a binding price floor?
Ans g.
At price= $ 12, supply is 20 units and Demand is 4 units hence there will be an excess supply of 16 units and floor price above equilibrium price will lead to shifting of consumer equilibrium to producer equilibrium. In such a case, the consumers may shift to substitutes as they have to pay higher prices for the same good, which might lead to market failure for the good.
- Why would policymakers choose to impose a price ceiling or price floor?
Ans h.
More than one reason may exist for policymakers to impose a price ceiling or price floor in a market. Often this is done in an attempt to increase equality; a price ceiling may be imposed if policymakers perceive the equilibrium price to be unfair to buyers, and a price floor may be imposed if policymakers perceive the equilibrium price to be unfair to sellers.
5. When the Shaffers had a monthly income of $8,000, they would usually eat out eight times a month. Now that the couple makes $8,500 a month, they eat out 10 times a month.
a. Compute the couple’s income elasticity of demand. Explain your answer. (Is a restaurant meal a normal or an inferior good to the couple?)
Ans a.
Income Elasticity of demand= %age change in quantity demanded/ %age change in income.
= (10-8/8)/(8500-8000/8000)
= 4.
Good are normal as income elasticity is positive.
b. List and explain the determinants of the price elasticity of demand.
Ans b.
- Availability of substitute- Substitutes are the goods which can be a replacement for the original product, the products having substitutes have elastic demand.
- Consumer Income- For higher income group demand is inelastic as the increase or decrease in demand doesn’t have a vital impact on demand, and reverse is true for lower income group i.e. elastic demand.
- Proportion of income spent- The products on which amount spent is very low in proportion to the income are inelastic and reverse holds good for the products having higher proportion.
- Nature of commodity- Necessities of life are inelastic, comfort goods are unitarily elastic where as luxury goods are highly elastic
- Period of use- If the use of the product can be postponed then the demand of the product is elastic
6. Suppose we are analyzing the market for wheat. For each of the events given below, state whether the demand curve and/or the supply curve would shift, provide reasons for the shift, and indicate the effect on the equilibrium price and equilibrium quantity.
a. The price of corn, a substitute for wheat, falls.
Answer
Demand curve will shift downward to left, as fall in price of corn will increase the demand of corn and decrease the demand of wheat at prevailing prices, due to which the equilibrium price and quantity will reduce.
- The number of wheat consumers increases.
Answer
With increase in wheat consumer, demand curve will shift upwards to right, which will increase the equilibrium price and quantity.
- A better method of harvesting wheat is introduced.
Answer
Supply of wheat will increase, which will shift the supply curve to right. Equilibrium price will reduce and equilibrium quantity will increase.
- Consumer income falls due to a recession, and wheat is considered a normal good.
Answer
Fall in consumer income will reduce demand of the normal goods, fall in demand will shift the demand curve downside to left. It will reduce the equilibrium price and quantity.
- Farmers expect the price of wheat to increase next month.
Answer
Expectation of increase in price in future will make the farmer to reduce the present supply, which will shift the supply curve upward to left due to which equilibrium price will increase and quantity will be reduced.
7. Consider the following equation: the market demand is given as QD = 60 − 3P, and market supply is given as QS = P + 12.
a. What is the market equilibrium price and quantity?
Answer
Equilibrium is the point at which quantity demanded= Quantity supplied on a given price.
QD = QS
By solving above
Price= 18
Quantity= 6
b. What is the difference between a “change in demand” and a “change in quantity demanded”?
Answer
Change in demand is shift in demand curve which is the result of change in factors other than price.
Change in quantity demanded is movement along the demand curve which is the result of change in price.
8. Government intervention
a. List and explain the three most important expenditure programs of the federal government. How do these differ from the three most important expenditure programs of provincial and local governments? Explain why it makes more sense for the federal government to purchase “national defence” rather than the provincial government.
Answer
The three expenditure programs of the federal government are :
- Social Security,
- national defense, and
- income security.
The three expenditure programs of state and local government are:
- education,
- public welfare, and
- highways.
It makes more sense for the federal government to purchase national defense as national defense is a public good.
b. A recent increase in federal gasoline taxes was estimated to cause a $150 million reduction in the total (consumer plus producer) surplus in the gasoline market. If tax revenues increased by $100 million, what is the dead-weight loss associated with the tax? As a result of the tax, 10,000 people sold their cars and started riding their bicycles to work. How much of the burden of the dead-weight loss is incurred by the bicycle riders?
Answer
The deadweight loss due to the tax will be 50 million. Due to lack of information it is impossible to know the burden of the deadweight loss by the bicycle riders.
c. The government often intervenes when private markets fail to provide an optimal level of certain goods and services. For example, the government imposes an excise tax on gasoline to account for the negative externality that drivers impose on one another. Why might the private market not reach the socially optimal level of traffic on the road without the help of government? Answer
Everyone agreed that the roads are crowded, but the reward to solve the problem is low, which is not motivating the people to reduce the usage of road. Therefore it proves that the government can improve the outcome by increasing the incentive of not using road.
d. Evaluate the following statement: When deciding whether to levy a corrective tax on consumers or producers, the government should be careful to levy the tax on the side of the market generating the externality.
Answer
The statement is False. Whether the source of externality is the seller or the buyer of a good there will be same reduction in quantity by taxing either the producers or the consumers. Therefore, it does not make any difference on whom the tax is imposed.
9. Using the graph below, assume that the government imposes a $5 tariff on TV sets. Answer the following questions given this information. Be sure to show your calculations.
- What is the domestic price and quantity demanded of TVs after the tariff is imposed?
Answer
Domestic Price= $25
Quantity Demanded= 350
- What is the quantity of TVs imported before the tariff?
Answer
Domestic Supply at $ 20= 200
Quantity demanded at $20 = 400
Quantity imported= 400-200= 200 TVs
- What is the quantity of solar panels imported after the tariff?
Answer
No information
- Assuming that there is no tariff, and the price of a TV is $30, what would be the amount of consumer surplus?
Answer
Area of triangle- E-30-0= ½ x 30 x 300 = $ 4500
- What would be the total amount of dead-weight loss due to the tariff?
Answer
Area of equilateral Triangle= 5 x 100 = $ 500
10. Suppose Canada and Jordan trade only with each other, and they both produce the same two goods: meats and tomatoes. Given their resources, Canada can process either 500 tonnes of meat per day or 400 tonnes of tomatoes. Jordan can process either 300 tonnes of meat or 600 tonnes of tomatoes. (10 marks)
a. Which country has the absolute advantage in producing in both goods? Why?
Answer
None of the country has an absolute advantage in producing both goods as Canada produce higher meat than Jordan whereas Jordan produce more tomatoes.
- What is the opportunity cost of producing one tonne of meat in Canada?
Answer
Opportunity cost of producing one tonne of meat in Canada= 400/500= 0.8 tonnes of Tomatoes
- What is the opportunity cost of producing one tonne of meat in Jordan?
Answer
Opportunity cost of producing one tonne of meat in Jordan= 600/300= 2 tonnes of Tomatoes
- Which country has the comparative advantage in producing meats? Why?
Answer
Since the opportunity cost of producing meat is lower in Canada then in Jordan, Canada has comparative advantage in producing meat.
- Which country has the comparative advantage in producing tomatoes? Why?
Answer-
Jordan has comparative advantage in producing tomatoes as it has higher opportunity cost of producing meat than Canada which means a lower opportunity cost of tomatoes.
ASSIGNMENT 2
. The data below show the relationship between number of workers hired and cost and revenue for a small, competitive farm in Alberta.
a. Complete the columns of marginal product of labour, value of marginal product of labour, and marginal profit. (3 marks)
|
b. If the farm above decided to maximize its profit, how many workers would it hire? Explain your answer.
Answer
The Farm should employee 4 labours in order to attain maximum profit, as profit is maximum when marginal profit is zero or lowest.
c. Given the results from question (b) above, let’s assume the above farm has now a fixed cost of $10, and labour is the only variable factor. What is the farm’s profit? Show your calculation.
Answer
Considering result of B profit would have been $ 420 and with fixed cost as $ 10, profit will be $ 410.
d. At what point do diminishing returns set in for the farm above? Explain.
Answer
From labour 2 diminishing return set in for the farm above as with increase in labour the marginal output is getting decreased.
2. a. Describe the process by which the market for capital and the market for land reach equilibrium. As part of your description, elaborate on the role of the stock of the resource versus the flow of services from the resource.
Answer
Equilibrium in markets for land and capital are computed by marginal product for these factors in relation to there supply. The difference among land markets and the market for labour is labour can be rented but land has to be purchased and further this difference can’t be nullified. In efficient markets the purchase price should proportionately reflect the value of the services generated by using land or capital.
b. When we consider all factors of production, such as labour, capital, and land, how can we find the market equilibrium? How do the changes of supply of one factor of production affect the use of other factors of production?
Answer
Marginal product of anyone factor depends on the usage of quantities of factor available. The assets available to used for production is limited. Therefore a producer has to decide a combination of inputs which would provide optimum profit and output which is called producer’s equilibrium, at which the maximum output attained at minimum costs.
The combination which will give producer highest output at lowest cost will the equilibrium point.
c. In 2014, the dangerous Ebola virus entered Canada when a Canadian resident returned to Canada after contracting the virus while visiting Liberia. Suppose this virus had not been contained and had spread to the general population. Describe the resulting effect on labour productivity. (Assume that the virus is lethal in half of the people who are exposed to it.)
Answer
The labour productivity will reduce which will reduce marginal product per labour. Hence it is probable that the supply will reduce and prices are of going to rise. Further there will be a short supply of labour.
3. A firm is selling its product in a perfectly competitive market, and the price for its product is $10.
a. Complete the TC, ATC, AFC, AVC, MC, TR, MR, and profit columns.
|
Total product |
FC |
VC |
TC |
ATC |
AFC |
AVC |
MC |
TR |
MR |
Profit |
|
0 |
2 |
0 |
2 |
0 |
0 |
0 |
|
0 |
|
-2 |
|
1 |
2 |
9 |
11 |
11 |
2 |
9 |
9 |
10 |
10 |
-1 |
|
2 |
2 |
17 |
19 |
9.5 |
1 |
8.5 |
8 |
20 |
10 |
1 |
|
3 |
2 |
24 |
26 |
8.7 |
0.7 |
8.0 |
7 |
30 |
10 |
4 |
|
4 |
2 |
30 |
32 |
8.0 |
0.5 |
7.5 |
6 |
40 |
10 |
8 |
|
5 |
2 |
36 |
38 |
7.6 |
0.4 |
7.2 |
6 |
50 |
10 |
12 |
|
6 |
2 |
45 |
47 |
7.8 |
0.3 |
7.5 |
9 |
60 |
10 |
13 |
|
7 |
2 |
55 |
57 |
8.1 |
0.3 |
7.9 |
10 |
70 |
10 |
13 |
|
8 |
2 |
65 |
67 |
8.4 |
0.3 |
8.1 |
10 |
80 |
10 |
13 |
|
9 |
2 |
78 |
80 |
8.9 |
0.2 |
8.7 |
13 |
90 |
10 |
10 |
|
10 |
2 |
93 |
95 |
9.5 |
0.2 |
9.3 |
15 |
100 |
10 |
5 |
b. At what price and output level will the above firm maximize its profit? Should this firm continue to sell in the long run? Explain your answer.
Answer
Firm shall sell at output level of 8 units with price of $ 10 as the marginal cost=marginal revenue at this point. No the firm shall not continue to sell this in long run as fixed costs are not fixed in long run and will change with change in production in long run.
c. Based on your answers in the table above, why are the AVC and ATC curves U‑shaped?
Answer
The shape of marginal cost curve which is the result of increasing and decreasing marginal returns is the reason behind the shape of AVC and ATC curves. The phenomenon behind the shape of the said curves is diminishing returns to variable factor.
4. Give two reasons that the long-run industry supply curve might slope upward. Use an
example to demonstrate your reasons.
Answer
First reason, in short run some factors of production are fixed but in long run all factors of production are variable. If a farmer has to increase its production it would have to buy land which will be possible in longrun only.
Second reason, in short run new entrants cannot enter into business but in long run there can be enteries into business which can increase supply.
5. At its current level of production, a profit-maximizing firm in a competitive market receives $12.50 for each unit it produces and faces an average total cost of $9. At the market price of $12.50 per unit, the firm’s marginal-cost curve crosses the marginal-revenue curve at an output level of 1,200 units. What is the firm’s current profit? What is likely to occur in this market, and why?
Answer
There will be profit of $4200 at the point where marginal cost curve crosses marginal revenue curve in a competitive market.In the competitive market maximum profit which a firm can earn is zero in longrun, if there is higher profit then new entrants will enter the market increasing the supply which will pull the prices down and profit to zero.
Prices will fall due to increase in supply and profit will fall to zero.
6. Suppose that the marginal cost of making a special coffee mug is constant at $7 per unit, and there is no fixed cost.
a. Complete the columns for total revenue, marginal revenue, average revenue, total cost, marginal cost, and profit. (6 marks)
|
# sold |
Price |
TR |
MR |
AR |
TC |
MC |
Profit |
|
0 |
16 |
0 |
|
0 |
0 |
|
0 |
|
2 |
15 |
30 |
15 |
15 |
14 |
7 |
16 |
|
4 |
14 |
56 |
13 |
14 |
28 |
7 |
28 |
|
6 |
13 |
78 |
11 |
13 |
42 |
7 |
36 |
|
8 |
12 |
96 |
9 |
12 |
56 |
7 |
40 |
|
10 |
11 |
110 |
7 |
11 |
70 |
7 |
40 |
|
12 |
10 |
120 |
5 |
10 |
84 |
7 |
36 |
|
14 |
9 |
126 |
3 |
9 |
98 |
7 |
28 |
|
16 |
8 |
128 |
1 |
8 |
112 |
7 |
16 |
|
18 |
7 |
126 |
-1 |
7 |
126 |
7 |
0 |
|
20 |
6 |
120 |
-3 |
6 |
140 |
7 |
-20 |
b. At what price and output level will the above firm maximize its profit? Explain your answer.
Answer
At the point where marginal revenue= marginal cost profit is maximum. Hence at price of $ 7 selling 10 units will give highest profit of $ 40.
7. Suppose that Firm A and Firm B are two of the largest producers of a special pool-cleaning robot. Suppose that the marginal cost of making such a robot is constant at $1,000 per unit, and there is no start-up cost. The demand for the robot is described by the following schedule.
a. Complete the columns for total revenue, marginal revenue, total cost, marginal cost, and profit.
|
Price |
Quantity |
TR |
MR |
TC |
MC |
Profit |
|
(in 000s) |
(in 000s) |
(in 000s) |
(in 000s) |
(in 000s) |
(in 000s) |
(in 000s) |
|
8 |
6 |
48 |
|
6 |
|
42 |
|
7 |
7 |
49 |
1 |
7 |
1 |
42 |
|
6 |
8 |
48 |
-1 |
8 |
1 |
40 |
|
5 |
9 |
45 |
-3 |
9 |
1 |
36 |
|
4 |
10 |
40 |
-5 |
10 |
1 |
30 |
|
3 |
11 |
33 |
-7 |
11 |
1 |
22 |
|
2 |
12 |
24 |
-9 |
12 |
1 |
12 |
|
1 |
13 |
13 |
-11 |
13 |
1 |
0 |
b. If the market for the robots was perfectly competitive, what would the price and quantity be?
Answer
Price would be $ 7 and units would be 7000 as marginal cost= marginal revenue at this point.
c. If there were only one supplier of robots, what would the price and quantity be?
Answer
Price would be $ 8 and quantity would be 6000 units.
d. If two firms formed a cartel, what would be the price and quantity? If two firms split the market evenly, what would be Firm A’s production and profit?
Answer
Quantity for the cartel will be 6000 units at $ 8. If the split market evenly A’s production will be 3000 units incurring $ 3 and revenue of $ 24000 i.e a profit of $ 21000.
e. What would happen to Firm A’s profit if it increased its production by 1,000 while Firm B stuck to the cartel agreement?
Answer
It will increase its profit by $7000 i.e $1 per unit cost and $ 8 per unit revenue till the point B stick to the cartel agreement.
8. Suppose that you are an owner of a company that produces a special weight-loss over-the-counter medicine in a monopolistically competitive industry. The demand and the total cost for your medicine per day are given by the following table.
a. Calculate ATC, MC, TR, MR, and profit for each bottle of the medicine produced.
|
Quantity demanded |
Price |
Total cost |
ATC |
MC |
TR |
MR |
Profit |
|
3 |
83 |
60 |
20 |
|
249 |
|
189 |
|
4 |
80 |
70 |
17.5 |
10 |
320 |
71 |
250 |
|
5 |
77 |
85 |
17 |
15 |
385 |
65 |
300 |
|
6 |
74 |
105 |
17.5 |
20 |
444 |
59 |
339 |
|
7 |
71 |
140 |
20 |
35 |
497 |
53 |
357 |
|
8 |
68 |
185 |
23.125 |
45 |
544 |
47 |
359 |
|
9 |
65 |
225 |
25 |
40 |
585 |
41 |
360 |
|
10 |
62 |
260 |
26 |
35 |
620 |
35 |
360 |
|
11 |
59 |
290 |
26.3636 |
30 |
649 |
29 |
359 |
|
12 |
56 |
315 |
26.25 |
25 |
672 |
23 |
357 |
b. How many bottles of this medicine should you produce to maximize profit, and what are the market price and the corresponding profit?
Answer
The point at which Marginal cost = Marginal revenue the firm will earn highest profit, since at level of 9 bottles the marginal revenue nearly equates with marginal cost, profit is maximum.
c. Suppose that you pay for an advertising flyer for a $52 flat fee, and after that, the demand for the medicine increases (see the table below for the new demand information). Based on new demand information, recalculate ATC, MC, TR, MR, and profit.
|
Quantity Demanded |
Price |
Total cost |
ATC |
MC |
TR |
MR |
Profit |
|
3 |
83 |
112 |
37.3333 |
|
249 |
|
137 |
|
4 |
80 |
122 |
30.5 |
10 |
320 |
71 |
198 |
|
5 |
77 |
137 |
27.4 |
15 |
385 |
65 |
248 |
|
6 |
74 |
157 |
26.1667 |
20 |
444 |
59 |
287 |
|
7 |
71 |
192 |
27.4286 |
35 |
497 |
53 |
305 |
|
8 |
68 |
237 |
29.625 |
45 |
544 |
47 |
307 |
|
9 |
65 |
277 |
30.7778 |
40 |
585 |
41 |
308 |
|
10 |
62 |
312 |
31.2 |
35 |
620 |
35 |
308 |
|
11 |
59 |
342 |
31.0909 |
30 |
649 |
29 |
307 |
|
12 |
56 |
367 |
30.5833 |
25 |
672 |
23 |
305 |
d. Explain how your answers in parts (a) and (b) change.
Answer
The point at which Marginal cost = Marginal revenue the firm will earn highest profit, since at level of 10 bottles the marginal revenue equates with marginal cost, profit is maximum.
9. Zach took $200,000 out of the bank and used it to start his new cookie business. The bank account pays 3 percent interest per year. During the first year of his business, Zach sold 17,000 boxes of cookies for $5 per box. Also, during the first year, the cookie business incurred costs amounting to $50,000.
a. What was Zach’s accounting profit for the year?
Answer
Revenue= 17000 x $ 5= $ 85000
Cost= $50000
Accounting Profit = Revenue- Cost= $35000
b. What was Zach’s economic profit for the year?
Answer
Opportunity cost = $200000 x 3%= $6000
Economic Profit= $35000-$6000= $29000
c. Should Zach continue with his cookie business?
Answer
Yes Zach shall continue his business as there is a positive economic profit.
d. A key difference between accountants and economists is their different treatment of the cost of capital. Does this difference result in an accountant’s estimate of total costs being higher or lower than an economist’s estimate? Explain your answer.
Answer
The treatment of not including cost of capital in the cost by accountants will make the cost lower comparative to economist’s expenditure. Hence accountants profit will be higher than economists profit.
10. Black Box Cable TV is able to purchase an exclusive right to sell a premium movie channel (PMC) in its market area. Let’s assume that Black Box Cable pays $150,000 a year for the exclusive marketing rights to PMC. Since Black Box has already installed cable to all of the homes in its market area, the marginal cost of PMC to subscribers is zero. The manager of Black Box needs to know what price to charge for the PMC service to maximize her profit. Before setting the price, she hires an economist to estimate demand for the PMC service. The economist discovers that there are two types of subscribers who value premium movie channels. First are the 4,000 die-hard TV viewers who will pay as much as $150 a year for the new PMC premium channel. Second are the 20,000 occasional TV viewers who will pay as much as $25 a year for a subscription to PMC.
a. If Black Box Cable TV is unable to price discriminate, what price will it choose in order to maximize its profit, and what is the amount of the profit?
Answer
Black box shall fix price at $ 150 which will give a profit of $ 600,000 further in this case there is chance that some occasional viewers might also opt for the same increasing profits.
b. If Black Box Cable TV is able to price discriminate, what would be the maximum amount of profit it could generate?
Answer
It would be able to generate a profit of $ 1100000.
c. What is the dead-weight loss associated with the nondiscriminating pricing policy compared to the price discriminating policy? (2 marks)
Answer
The dead-weight loss associated with the nondiscriminating pricing policy compared to the price discriminating policy is $ 100000.
d. List and explain two conditions necessary for firms to be able to successfully practice price discrimination.
Answer
- Firm Must Be A Price Maker
Firm shall be operating in an imperfect competitive market with downward sloping demand curve.
- Product Versioning
Firm shall be able to make different version of the product which can be charged with different prices.
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