# ECON 342 ECON342 Homework 4 with Answers (Penn State University)

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ECON 342 ECON342 Homework 4 Answer (Penn State University)

1. (18 total points) Suppose a manufacturer is a monopoly.  This manufacturer produces a good at MC = 4 and sells it to a retailer.  The manufacturer has no fixed costs.  The retailer is also a monopoly, and it sells the good bought from the manufacturer to consumers.  The retailer has no additional costs other than the price they pay to the manufacturer.  The retailer faces a demand curve P = 100-3Q, where Q is the number of units sold.

2.  (12 points) Suppose a typical used car buyer is willing to pay \$6000 dollars for a low-quality used car (Lemon), and \$16,000 for a high-quality car (Plum).  Also, suppose the market supply of Plums is given by QP = -60 +.01P and the market supply of Lemons is given by QL = -20 +.01 P.  Let the typical buyer’s belief that a car of unknown quality is a Plum = z, so (1-z) is the probability that a car of unknown quality is a Lemon.

3.  (12 points) Suppose that a consumer’s demand for a product is given by P = 80 – 2Q.  A monopolist produces the product at constant marginal cost, where MC = \$6.  The firm has no fixed costs.  Suppose the monopolist sets a two-part tariff for the good where the consumer must pay an amount T for the right to purchase the good, and then the consumer pays a price P for each unit of the good purchased.

4.  (8 points) Suppose a restaurant sells two goods, cheeseburgers and French fries.  The restaurant uses a mixed bundling pricing scheme which is as follows:  A consumer can buy a cheeseburger for \$2, an order of French fries for \$1.50, or they can purchase a combo which includes one cheeseburger and one order of French fries for a price of \$3.  For each consumer, indicate whether the consumer would purchase a) only the cheeseburger, b) only the French fries, c) the combo, or d) nothing.

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