Economics 201 Microeconomics

Tutorial 8

Question 1:

Consider a natural monopoly with declining average cost curve summarized by the equation C = 16 +Q where C is in dollars and Q is in millions of units. Demand for the natural monopolist’s service is given by P = 11 – Q. (i) Suppose this monopolist operates as an unregulated monopolist and is allowed to charge the monopoly price. Determine the price and output of the unregulated monopolist. (ii) On the other hand suppose that the monopolist is regulated by the State and the State Regulatory Board institutes average cost pricing. What is the appropriate price and quantity?

Question 2:

A golf course operator must decide what “greens fees” (prices) to charge on rounds of golf. Daily demand during the week is P_d = 36 – Q_d/10 where Q_d is the number of 18-hole rounds and P_d is the price per round. Daily demand on the weekend is P_w = 50 – Q_w/12. Assume that wear and tear on the golf course is negligible, i.e. the marginal cost is zero. The operator only has fixed costs. This implies that in this situation maximizing profit is analogous to maximizing revenue. So for the rest of this problem just compare revenues.

(i) What prices should the operator charge for each round during (1) the week and (2) the weekend?

(ii) Suppose the operator did not charge separate prices during the week and the weekend. He treats weekend and weekday demand combined as one market and sets the same price for both. What price would he charge in that case?

(ii) Show that the revenue he gets in Part (i) exceeds that in Part (ii).

Question 3:

A cruise line has space for 500 passengers on each voyage.  There are two market segments:  elderly passengers and younger passengers.  The demand curve for the elderly market segment is Q₁ = 750 – 4P₁.  The demand curve for the younger market segment is Q₂ = 850 – 2P₂.  In each equation, Q denotes the number of passengers on a cruise of given length and P denotes the price per day.  The marginal cost of serving a passenger of either type is $40 per person per day.

(i) Assuming the cruise line can price discriminate, what is the profit-maximising number of passengers of each type?

(ii) What is the profit maximising price for each type of customer?