Discrimination and Monopolistic Competition
Prof. Andrew J. Buck
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
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.
= 50 - .25Pa
= 150 – 2.5Pc
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 = Qa + Qc 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
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.
Write the equation for the adult marginal revenue curve and then plot this
appropriate panel of your graph.
Write the equation for the child marginal revenue curve and then plot this
in the other
panel of your graph.
marginal (= average) cost function in both panels of your graph.
What fare does Mosbacher charge in the adult submarket and how many tickets
day does it
Compute the point elasticity of demand at (Pa,Qa).
What fare does Mosbacher charge and how many tickets does it sell in the
Compute the point PED at (Pc,Qc).
What profit is Mosbacher earning? Profit =
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.
Write the equation for the associated marginal revenue curve and plot this
relationship in your graph.
How many pizzas does Ciao sell per day? What price does it charge?
Q = P =
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? Pdelivered =
Bea Busy lives 10 miles from Ciao and was an economics major in college.
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.)
monthly demand for kangaroo tail soup is Q = 100 - 40P where Q is measured
in ounces. Plot this relationship in a graph.
What is the highest amount Matilda would be willing to pay for 40 ounces if
her alternative is to get none at all?
A local caterer produces kangaroo tail soup under conditions of constant
MC = AC = 2.
If it is a successful first degree price discriminator, what profit will it
earn on the
soup sold to Matilda? Profit =