FIN 605 Week 5 Homework | Assignment Help | Kogod School Of Business American University

FIN 605 Week 5 Homework | Assignment Help | Kogod School Of Business American University 


1. Price discrimination requires the ability to sort customers and the ability to prevent arbitrage. Explain how the following can function as price discrimination schemes and discuss both sorting and arbitrage:


a. Requiring airline travelers to spend at least one Saturday night away from home to qualify for a low fare.

b. Insisting on delivering cement to buyers and basing prices on buyers’ locations.

c. Selling food processors along with coupons that can be sent to the manufacturer to obtain a $10 rebate.

d. Offering temporary price cuts on bathroom tissue.

e. Charging high-income patients more than low-income patients for plastic surgery.


Q-3 In Example 11.1, we saw how producers of processed foods and related consumer goods use coupons as a means of price discrimination.                    Although coupons are widely used in the United States, that is not the case in other countries. In Germany, coupons are illegal.


a. Does prohibiting the use of coupons in Germany make German consumers better off or worse off?


b. Does prohibiting the use of coupons make German producers better off or worseoff?


Q-5 A monopolist is deciding how to allocate output between two geographically separated markets (East Coast and Midwest). Demand and marginal revenue for the two markets are

P1 = 15 – Q1 MR1  = 15 – 2Q1

P2 = 25 – Q2 MR2  = 25 – 4Q2


The monopolist’s total cost is C = 5 + 3(Q1 + Q2 ). What are price, output, profits, marginalrevenues, and deadweight loss (i) if the monopolist can price discriminate? (ii) if the law prohibits charging different prices in the two regions?



Q-8 Sal’s satellite company broadcasts TV to subscribers in Los Angeles and New York. The demand functions for each of these two                    groups are

         QNY = 60 – 0.25PNY         QLA = 100 – 0.50PLA

               where Q is in thousands of subscriptions per year and P is the subscription price per year. The cost of providing Q units of service                   is       given by

                  C = 1,000 + 40Q

                 where Q = QNY + QLA.

a. What are the profit-maximizing prices and quantities for the New York and Los Angeles markets?


b. As a consequence of a new satellite that the Pentagon recently deployed, people in

       Los Angeles receive Sal’s New York broadcasts, and people in New York receive Sal’s

      Los Angeles broadcasts. As a result, anyone in New York or Los Angeles can receive Sal’s broadcasts by subscribing in either city.                Thus     Sal can charge only a single price. What price should he charge, and what quantities will he sell in New York and Los Angeles?


c. In which of the above situations, (a) or (b), is Sal better off? In terms of consumer surplus, which situation do people in New York prefer           and which do people in Los Angeles prefer? Why?


11. Look again at Figure 11.12, which shows the reservation prices of three consumers for two goods. Assuming that the marginal production cost is zero for both goods, can the producer make the most money by selling the goods separately, by bundling, or by using

“mixed” bundling (i.e., offering the goods separately or as a bundle)? What prices should be charged?







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