1. The following shows the demands and marginal revenue in two markets, 1 and 2, for a price
discriminating firm along with total marginal revenue, MRT, and marginal cost MC.
For reference, P1 = 600 5Q and P2 400 5Q.
Compare the demand conditions in each market; i.e. how do the two markets differ in their
demand for the firm's product?
b. How much total output should the firm produce (for both markets combined)? How should
that output be allocated between markets 1 and 2? (It would be easiest to copy and paste
the picture above and draw directly on the picture using Insert, Shapes to do parts b and
c. What price should the firm charge in each market?
2. Netflix has three different subscription plans for streaming video: watch one screen at a time
in Standard Definition for $7.99 per month; watch two screens at a time in High Definition for
$10.99 per month; or watch four screens at a time in High and Ultra-High Definition for $13.99
per month. The ongoing difference in cost to Netflix between providing the one-screen plan
vs. the four-screen plan is essentially zero. How do you explain the wide variety of prices for
virtually the same service, given that the cost to Netflix of providing each plan is basically the
3. Shaughnessy Consulting, LLC currently enjoys a patent on software that estimates economic
damages for clients involved in personal injury lawsuits. Demand for my software is
QD = 60.3 - 0.1P. Creating the software cost me about $2,000 in development and coding. I
can produce a copy of the software for $3.00 per unit (constant cost).
a. How many copies of the software should I attempt to sell? At what price should I sell it?
How much profit would make?
b. My patent expires in a year, and know other economic consultants will produce competing
software. What quantity and price will result once competing software emerges? How
much consumer surplus will my clients (lawyers) gain once the competitors enter? (For
measuring consumer surplus, recall that area of a triangle = 1/2 * base height.)
c. How much deadweight loss is created by my patent and monopoly in this software?
4. After considering the situation of market power for my software and how it changed after the
introduction of competitors, consider situations of natural disasters and how governments
respond to shortages resulting from them.
a. Read this article and comment on why anti-gouging laws can increase social welfare.
b. In contrast, read this blog post and comment on why anti-gouging laws may not increase
social welfare, or at least why they may lead to consequences which are unintended by the
Which argument do you find more persuasive, and why? I.e., should governments continue
to use anti-gouging laws to correct supposed market failures occurring after natural
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1. a. Market 1 consists of high demanders for the product and market 2 is the market for low demanders of the product. This is because the intercept of the first market demand is higher than that compared to the 2nd market.
b. The decision of the total output is decided by the point where MRT equals MC. Here the total output is at 40 units. At this price $300, MR1 is at 30 units implying that 30 units would be allocate to market 1 and MR2 is at 10 units and 10 units would be allocated to market 2 as shown in the following figure....