Question 1: Suppose you are a monopolist of a parking garage that rents parking spots out by the hour. You have 100 spots available to rent. Inverse demand for parking spots is given by p(q) = 64 − 4q. While you could always sell the parking garage to commercial developers, on any
given day the marginal cost of renting out a stall is zero.
(a)What is your profit function?
(b)What is the first order condition corresponding to your profit maximizing problem?
(c)What are your profits and what is consumer surplus?
- You notice someone sitting in their vehicle and staring blankly out the window. Concerned, you ask the person whether he is alright. He responds that he is fine, that he had to run into a store for 5 minutes, but intends to make use of the remaining 55 minute because he paid for the full hour. Comment.
Question 2: You own and operate a cupcake store that is adjacent to a muffin shop; all that separates the two businesses is a wall. Your cost function is C(q) = 36 − 2q + q2, where q represents the number of cupcakes produced and the 36 represents what the salary you pay your head baker. The muffin shop next door has cost function C(q) = 36 − 4q + q2 where q represents the number of muffins produced and which also employs a head baker at a wage of 36.
(a)Which of the cupcake or muffin shop have economies of scale? If so, up to what level of production?
- Suppose you purchased the muffin shop next door which would allow you to fire one of the head bakers. Is this an example of you exploiting economies of scale or economies of scope? Explain.
Question 3: Suppose you are a monopolist airline on a given route. You know that you have two types of customers: tourists who are price sensitive and business travelers who are not. While you can usually tell them apart in person, when they book tickets online you find it impossible to differentiate them. All you know is that tourists tend to plan vacations weeks if not months in advance, while business travelers only know when their next meeting will be within a week’s notice. An economist suggests that you adopt the following pricing scheme: when the flight is more than a week away, set a price equal to the tourists’ willingness to pay and when the flight is within a week’s time, set a price equal to the business people’s willingness to pay.
- What are the three prerequisites necessary for a successful third degree price discrimination scheme?
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(b)How does this pricing scheme effectively prevent business people from “pretending” to be tourists to obtain lower prices?
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