Changing Space of Indian Banking

Questions On 3rd Degree Price Discrimination

Questions with Solutions Provided:

1-5. A monopoly producer of music videos is able to sell these to TV stations and also to individual consumers.  Because TV stations have special formatting and quality requirements, producers are able to separate these two types of consumers and sell them  essentially the same product at two different prices. You are given the following demand curves per year for these distinct markets:

TV stations:         P1 = 80 - .01Q1

Individual consumers: P2 = 60 - .01Q2

where P refers to prices charged to each group and Q refers to quantities demanded by each group.  The variable cost of producing music videos (once the video has been shot) is uniform at $4 per video. In addition there are sunk fixed costs of $20,000 for the shooting of each music video (for design, promotion and hiring artists).  Questions 1 through 5 concern this case.

1.  If the producer of music videos can price discriminate by charging different prices to each group, the profit-maximizing price charged to TV stations will be:

A) $0                B) $8                C) $10                D) $12                E) $14                F) $16

G) $18                H) $20                I) $22                J) $24                K) $26                L) $28

M) $30        N) $32                O) $34          P) $36                Q) $38          R) $40

S) $42                T) $44                U) $46                V) $48                W) $50        X) $52

Y) $54                Z) none of the above

2.  If the producer of music videos can price discriminate by charging different prices to each group, the profit-maximizing price charged to individual consumers will be:

A) $0                B) $8                C) $10                D) $12                E) $14                F) $16

G) $18                H) $20                I) $22                J) $24                K) $26                L) $28

M) $30        N) $32                O) $34          P) $36                Q) $38          R) $40

S) $42                T) $44                U) $46                V) $48                W) $50        X) $52

Y) $54           Z) none of the above

3.  Assume now that the monopoly producer of music videos is unable to discriminate between these groups but must sell at a uniform price.  What price will now be charged?

A) $0                B) $8                C) $10                D) $12                E) $14                F) $16

G) $18                H) $20                I) $22                J) $24                K) $26                L) $28

M) $31        N) $33                O) $35          P) $37                Q) $39          R) $41

S) $43                T) $45                U) $47                V) $49                W) $51        X) $53

Y) $54                Z) none of the above

1. By how much will profit rise (+) or fall (-) as a result of the move to a single price

A) -$68,200        B) -$8,400        C) -$6,400        D) -$5,000        E) -$2,000        F) $0

G) +$500        H) +$1,000        I) +$2,000        J) +$2,500        K) +$3,250        L) +$3,800

M) +$4,500        N) +$4,800        O) +$5,700        P) +$6,000        Q) +$7,400        R) +$8,400

S) +$9,700        T) +$10,800        U) +$11,800        V) +$12,000        W) +$13,500        X) +$14,200

Y) +$20,250 Z) none of the above

1. For the TV stations only, by how much has consumer surplus fallen (-) or risen (+) in moving from the price discrimination situation to the normal monopoly situation with no price discrimination?

A) -$68,200        B) -$8,400        C) -$6,400        D) -$5,000        E) -$2,000        F) $0

G) +$500        H) +$1,000        I) +$2,000        J) +$2,500        K) +$3,250        L) +$3,800

M) +$4,500        N) +$4,800        O) +$5,700        P) +$6,000        Q) +$7,400        R) +$8,400

S) +$9,700        T) +$10,800        U) +$11,800        V) +$12,000        W) +$13,500        X) +$14,200

Y) +$20,250 Z) none of the above

1. Imagine a different situation (not related to the music videos above) in which a monopolist is serving two distinct markets.  Imagine that you know that the elasticity of demand in the first market is –1.25.  In the second market, the elasticity of demand is –5.  The marginal cost of production of the good is constant at $20.  Assuming the monopolist engages in price discrimination, what is the ratio of the price charged in the first market to the price charged in the second market?

A) 0                B) 0.1                C) 0.2                D)0.25                E) 0.3                F)0.33

G) 0.4                H) 0.5                I) 0.5714        J) 0.67                K)0.7                L) 0.75

M) 0.8                N) 0.9                O) 1.2                P) 1.4                Q) 1.6                R)1.75