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EC 260 > Lesson 2.3 > Flashcards

Lesson 2.3 Flashcards

1
Q

draw producer surplus, consumer surplus and deadweight loss for a monopoly

A

Equilibrium price is through MR = MC to hit demand curve; CS is below demand and above Price and over to equilibrium quantity; PS is above MC and below price and over to equilibrium quantity; deadweight loss is triangle to left of MC = demand to equilibrium demand

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2
Q

examples of price discrimination

A

colleges awarding financial aid

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3
Q

what customers value the good higher than the equilibrium price in a monopoly (i.e. reservation price is higher)

A

segment of demand curve from top to equilibrium price

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4
Q

explain customers on demand curve from equilibrium price to where MC = demand

A

unwilling to spend equilibrium price for good but reservation price exceeds MC and so they represent profitable sales, but these sales are not made by the monopolist because their equilibrium output stops before

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5
Q

where does profitable output continue until in monopoly?

A

where Q goes through MC = demand

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6
Q

what happens if monopolist raises equilibrium price?

A

producer surplus increases

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7
Q

what happens if monopolist lowers equilibrium price?

A

consumer surplus increases

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8
Q

can a monopolist actually change equilibrium price and why and what is the result of that?

A

no, it is profit maximizing price. to capture consumer surplus and increase producer surplus they need to do it with more than 1 pricing strategy

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9
Q

when should a manager use multiple pricing strategies?

A

if benefit of capturing profit exceeds costs of doing so

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10
Q

define: pricing discrimination

A

When the same (or similar) product is sold at more than one price

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11
Q

when is differences in similar products considered pricing discrimination?

A

when the differences do not reflect cost differences; when products are sold at prices that are in different ratios to their MC

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12
Q

3 types of pricing discrimination

A

1st, 2nd, 3rd degree

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13
Q

what is first degree price discrimination also called?

A

perfect price discrimination

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14
Q

examples of first degree price discrimination

A

haggling, car dealerships

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15
Q

where is output for a monopolist in first degree

A

where reservation price / market demand (which becomes MR) = MC

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16
Q

what is market demand?

A

consumer reservation price

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17
Q

what happens when managers can perfectly discriminate to serve customers from top of demand curve to price equilibrium

A

producer surplus becomes producer surplus + consumer surplus

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18
Q

what is producer surplus also called?

A

variable cost profit

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19
Q

what happens when managers can perfectly discriminate to serve customers from price equilibrium to demand curve where demand = MC

A

increase producer surplus to include the deadweight loss

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20
Q

when are managers price discriminating of 1st degree?

A

when they capture all consumer surplus and deadweight loss

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21
Q

under 1st degree, what price do managers charge customers?

A

reservation price

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22
Q

what must managers do to do 1st degree?

A

small number of buyers and must be able to estimate reservation price

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23
Q

how must 1st degree be operationalized?

A

by a 2-part tariff

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24
Q

example of second degree price discrimination

A

utilities

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25
Q

what happens in second degree? and where is producer surplus

A

charges different prices for different quantities of good; for goods less than x, consumer gets charged where x hits demand curve and producer surplus is that rectangle to the left

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26
Q

where is consumer surplus in second degree?

A

all areas where producer surplus is not

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27
Q

why is there consumer surplus in second and third degree but not first degree?

A

discrimination occurs at group level not individual level so consumers retain some surplus

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28
Q

which form of price discrimination is most common?

A

3rd degree

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29
Q

3 conditions for 3rd degree to hold

A

1) Demand must be heterogeneous (different demand segments must have significantly different price elasticities of demand)
2) Managers must be able to identify and segregate different segments at moderate cost
3) Markets must be successfully sealed; customers in one segment must not be able to transfer goods to another segment

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30
Q

where do differences in price elasticities arise?

A

income, taste or availability of substitutes

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31
Q

example of 3rd degree pricing

A

students have high price elasticity of demand since they have low income; they are price sensitive; often times they get a discount on goods; airlines

32
Q

what do managers need to do for 3rd degree with respect to Q and P

A

Managers need to decide how much output to allocate to each class of buyer and at what price so that MR is equal in all classes and classes with lower price elasticity of demand are charged a higher price

33
Q

what happens in MR class 1 > MR class 2

A

managers should allocate more output to class 1 until MR 1 = MR 2

34
Q

ideal output for 3rd degree

A

MR of each class should be equal and should be equal to MC

35
Q

profit for 3rd degree

A

profit = TR class 1 + TR class 2 - TC

36
Q

why can we separate MR for 3rd degree and not MC?

A

because revenues in classes are independent of each other whereas MC is not

37
Q

Total optimal output 3rd degree graph

A

Let G = horizontal summation of MR curves, then optimal total Q is where MC = G

38
Q

elasticity/inelasticity/price sensitivity of people who use coupons/rebates and those who don’t

A

people who use coupons are more elastic, more price sensitive; people who don’t use coupons are more inelastic

39
Q

what do coupons and rebates lead people to do?

A

self-select their market segment

40
Q

why do managers use coupons/rebates to price discriminate?

A

because customers on less elastic portion of demand curve are willing to pay more (buy good without coupon)

41
Q

how to determine price and coupon with coupon/rebate price discrimination

A

1) MR1 = P(1+1/n1) = MC where class 1 is more inelastic (pay without coupon)
2) MR2 = (P-X)(1+1/n2) = MC where class 2 is more elastic (pay with coupon)
3) Price is same for both segments, and X is amount of coupon

42
Q

when is there 2 different demand curves?

A

when MR of class segments are different

43
Q

what is peak load pricing also called?

A

intertemporal pricing

44
Q

issues of peak load pricing

A

Demand for goods is time sensitive or seasonal whereas plant capacity is constant

45
Q

examples of peak load pricing

A

roadways, electricity generation, resort and hotel rooms, books released as hard-bound with higher price first; leaders and followers in market

46
Q

what prices should managers charge in peak load pricing?

A

high prices in the peak and low in the trough

47
Q

MC at peak and trough in peak load pricing

A

MC is usually high in peak because supplier is operating at or near capacity and low in trough

48
Q

similarities and differences in peak load pricing and 3rd degree discrimination

A

Both peak load pricing and 3rd degree have separate MR curves for each class but in 3rd degree both classes share same supplier capacity at same time so in 3rd degree MC is a function of Q1 + Q2; in peak load pricing classes share same supplier capacity at different times so, Q1 and Q2 are independent on MC

49
Q

optimal solution in peak load pricing and graph

A

MR1 = MC and MR2 = MC; optimal output and price for each class is through where MC = MR for each class and hits demand curve for each class

50
Q

define 2 part tariffs

A

when managers set prices so that consumers pay an entry fee and then a use fee for each unit of the product they consume

51
Q

example of 2 part tariff

A

golf clubs, phone plans, personal seat license

52
Q

what is entry fee designed for?

A

to extract consumer surplus

53
Q

what is entry fee and use fee like?

A

entry fee like fixed cost and use fee is like variable cost

54
Q

what do we assume? (optimal 2 part tariff when all demanders are the same)

A

each demander has same demand curve, identical preferences; demand curve: P = a - bQ; MC is constant

55
Q

profit maximization(optimal 2 part tariff when all demanders are the same)

A

use fee (P*) = MC and entry fee = consumer surplus

56
Q

profit (optimal 2 part tariff when all demanders are the same)

A

consumer surplus * demanders - fixed cost

57
Q

what happens to MC curve when it is constant and horizontal?

A

MC = AVC

58
Q

what does optimal 2 part tariff enable managers to do?(optimal 2 part tariff when all demanders are the same) and what is TR the same as

A

Enables managers to act as 1st degree pricing discriminators. Capture entire consumer surplus through entry fee and convert it into producer surplus. Total Revenue is the same as 1st degree

59
Q

where do managers produce? (optimal 2 part tariff when all demanders are the same)

A

where Q is where MC/AVC = demand curve

60
Q

benefits of 2 part tariff

A

1) Entry fee is collected at beginning of demand period
2) Managers do not need to know reservation price, they collected the surplus with entry fee
3) Customers reveal preferences

61
Q

explain 2 part tariffs with rising MC curve

A

1) MC is upward sloping and linear
2) use fee = MC and entry fee = CS
3) revenue from use fee is square from where P = MC and demand curve and down
4) PS/variable cost profit is positive when MC has positive slope

62
Q

explain strong demander

A

willing to purchase more units than weak demander at any given price

63
Q

2 part tariff - what to do with strong demander and weak demander

A

1) charge entry fee = CS of strong demander and use fee=MC
2) weak demander is excluded from market because their MC (use fee) is greater than their marginal benefit (CS)
3) VC profit = entry fee

64
Q

2 part tariff - what to do when strong demander is not much stronger than weak demand

A

1) set use fee at or above MC at price that maximizes variable cost profit and entry fee = CS of weak demander
2) strong demander will realize some CS
3) variable cost profit will be entry fee *2

65
Q

in 1st degree, what is the additional revenue managers generate by selling an additional unit of product?

A

consumer’s reservation price

66
Q

in 1st degree, what is output and MC same as?

A

perfectly competitive market

67
Q

how to find output and price in first degree?

A

price is P = MC and Q = where Demand (MR) = MC

68
Q

in 1st degree, what does MC turn into?

A

AVC

69
Q

in 1st degree, what does demand curve turn into

A

MR

70
Q

optimal profit for 3rd degree

A

when derivative of profit wrt Q1 and derivative of profit wrt Q2 is 0

71
Q

what is the elastic portion of the demand curve?

A

the upper part

72
Q

what is variable cost of serving customer?

A

area under MC curve to where it hits Q

73
Q

variable cost profit with 2 part tariff with rising marginal cost

A

CS+PS since entry fee = CS

74
Q

2 part tariff - optimal use fee

A

1) set use fee = P*
2) find variable cost profit from use fee (P-MC)(Q of both added)
3) find consumer surplus from weak demanders = entry fee wrt P
4) find variable cost profit from entry fee (entry fee * 2)
5) find total variable cost profit
6) then maximize variable cost profit
optimal strategy is one where variable cost profit is optimizes

75
Q

if monopolist does not price discriminate, what is optimal price and output

A

1) let P for each = P
2) solve Q = Q1+Q2
3) find TR
4) Find MR
5) let MR = MC
6) find total Q and P
7) input P into individual demand functions to find individual output, don’t divide by 2

76
Q

what is the formula for the demand curve

A

P = a-bQ

EC 260 (11 decks)

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