Question 2

The table below shows the monthly MB from movies for two individuals: Rey and Finn.

Suppose the cinema has marginal cost $4. Initially suppose that last month the market consisted only of Rey and Finn.

i What would have been the cinema’s profit maximising linear price last month? I dentify this price using the concepts of marginal revenue and marginal cost.

iiHow many units are purchased by Rey and how many by Finn when the firm sets the  profit maximising price? What is the value of each customer’s consumer surplus?

b Suppose that this month the cinema obtained an additional customer: Poe. (Thus this month the market consists of 3 customers.) Poe has the same monthly MB for movies as Finn.

i What would be the cinema’s profit maximising linear price this month? Identify this price using the concepts of marginal revenue and marginal cost.

iiHow many units are purchased by each customer when the firm sets the  new profit maximising price? What is the value of each customer’s consumer surplus?

Provide intuition for the difference in the results between this month’s and last month’s price and consumer surplus.

ivIn the above example, provide an intuitive explanation for the change in the cinema’s profit when Poe joins the market? 

vWould the addition of extra customers ever cause the firm’s profit to fall? Provide a succinct explanation.

viYou should not have need to know the value of the firm’s fixed cost to answer the above question. Provide an explanation why that was not necessary. However, on this point, one should really add a caveat to the conclusions made in the earlier sections.  What is that?

cNow suppose, in contrast to part b above, that Rey and Finn live in the village “Jakku” while Poe lives in the village “D'Qar”. Also assume now that each village has a cinema owned by the firm. Rey, Finn and Poe are the firm’s only customers.

 iWhat would be the profit maximising pricing strategy in this case, given each cinema must set a linear price?

Question 3

Consider the following data for the marginal benefit (MB) of three consumers for a particular good.

Suppose that the firm which supplies this good has a fixed cost of $10 and marginal cost of $3,  so that total cost is TC = 10 + 3Q , where Q represents output. Suppose the firm is able to bundle its output. 

aSuppose Han is a student and thus has a student card, and the other two customers do not.  In this case the firm could offer separate prices for students and non-students.

iFind the profit maximising bundles the firm sells.  

iiWhat level of consumer surplus does each consumer receive? Provide an intuitive reason for the differences in consumer surplus received by customers.

bNow consider the case in which Leia and Han are both students, but Luke does not.  In this case also the firm could offer separate prices for students and non-students.

iFind the profit maximising bundles the firm sells. 

iiWhat level of consumer surplus does each consumer receive? Provide an intuitive reason for the differences in consumer surplus received by customers.

cProvide an explanation for the difference in profit you found in part a and part b? 

dNow consider the case in which neither Leia nor Han have identification, like student cards discussed above, which could be used to  identify them as members of a low MB group. However Luke has a membership card to an exclusive golf club. 

iIn this example, could the firm profit by offering a particular price to people who show their golf club membership card? 

iiHow would the firm go about pricing in this case? Identify the key economic characteristics of the firm’s optimal pricing scheme. Will profit be higher or lower than that obtained under the assumptions of part a and part b?

Question 4

aConsider the following customers, who purchase only one unit of a product but differ in their marginal benefit from quality.Identify the profit maximising way to price and produce this product if the firm cannot identify which customer is Snoke and which is Kylo?  Assume zero fixed cost. 

b Consider a coffee shop which sells only one product, cups of coffee. Suppose the world price of coffee beans (which are used to make the firm’s coffee) has just risen significantly. The increase in the world price of coffee beans is expected to last one month.

iSomeone in the shop argues that the price they set for a cup of coffee should be increased while the world price of coffee beans is high to minimise the fall in profit. What would standard economic reasoning say about this suggestion?

 iiWhat implications, if any, might prospect theory have for the suggestion made in part i?

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