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