Price Discrimination and Monopolistic Competition

Department of Economics Prof. Andrew J. Buck

Temple University Economics 201

Name

For this homework you will find it helpful to draw the suggested graphs. These are for your benefit and will not be graded.

A. Bus Tickets

The Mosbacher Bus Company provides jitney service between two rural communities. It sells tickets to both adults and children. The demand functions for the two groups are given below.

Adults: Q_{a} = 50 - .25P_{a} Children: Q_{c} = 150 – 2.5P_{c}

The Q’s are the number of trips demanded per day by the two groups and the P’s are the fares. Assume that Mosbacher is a constant cost third-degree price discriminator with TC = 25Q, where Q = Q_{a} + Q_{c} is the total number of trips taken per day by the two groups together. (Note that this says that the cost of a trip for a child is the same as for an adult.)

Being by plotting the two demand curves side-by-side on two sets of axes; price on the vertical and quantity on the horizontal. Plot the adult demand curve in the left panel and the child demand curve in the right panel. Use the same vertical and horizontal scales in each diagram.

A1. Write the equation for the adult marginal revenue curve and then plot this relationship

in the appropriate panel of your graph.

MR_{a} = + Q_{a}

A2. Write the equation for the child marginal revenue curve and then plot this relationship

in the other panel of your graph.

MR_{c} = + Q_{c}

Plot Mosbacher’s marginal (= average) cost function in both panels of your graph.

A3. What fare does Mosbacher charge in the adult submarket and how many tickets per

day does it sell there?

P_{a} = Q_{a} =

A4. Compute the point elasticity of demand at (P_{a},Q_{a}). PED_{a} = _________________

A5. What fare does Mosbacher charge and how many tickets does it sell in the child

submarket?

P_{c} = Q_{c} =

A6. Compute the point PED at (P_{c},Q_{c}). PED_{c } =

A7. What profit is Mosbacher earning? Profit =

B. Pizza

Ciao Down is one of 177 identical pizza parlors in a large metropolitan area. Its long run average and marginal cost curves are shown in the figure below. You should print the figure on a separate piece of paper. When the industry is in long run equilibrium, Ciao faces the demand schedule Q = 90 - 10P. Q is the quantity of pizzas sold per day and P is the store price. Ciao charges $2 plus $1.50 per mile (one way) for home delivery. This fee exactly covers its delivery costs.

Plot Ciao’s demand curve in the graph.

B1. Write the equation for the associated marginal revenue curve and plot this relationship in your graph.

MR = + Q

B2. How many pizzas does Ciao sell per day? What price does it charge?

Q = P =

B3. What is its total cost at this level of production? TC =

B4. What profit is it earning? Profit =

B5. Susan Lazy lives 5 miles from Ciao Down and never cooks. What is the delivered

price of a pizza at her house? P_{delivered} =

B6. Bea Busy lives 10 miles from Ciao and was an economics major in college. She

calculates that the cost of a home-made pizza (including the value of her time) is $25.

Does she make her own pizzas or buy from Ciao? (Assume the two types of pizza

taste the same.) Make Buy

C. Soup

Matilda Waltzing's monthly demand for kangaroo tail soup is Q = 100 - 40P where Q is measured in ounces. Plot this relationship in a graph.

C1. What is the highest amount Matilda would be willing to pay for 40 ounces if her alternative is to get none at all?

Reservation Price =

C2. A local caterer produces kangaroo tail soup under conditions of constant cost with

MC = AC = 2. If it is a successful first degree price discriminator, what profit will it

earn on the soup sold to Matilda? Profit =