Ch07-HW

1) Perfectly competitive markets lead to an efficient allocation of resources. Prices reflect consumers’ marginal willingness to pay for a good as well as supplier’s marginal cost of providing the good. Explain how this interpretation of prices is not valid for firms with monopoly power. Are resources allocated efficiently at the equilibrium price?

2) Patents encourage innovation by offering inventors limited monopoly rights, but could monopolies stifle innovation? Discuss this possibility in a short paragraph, making reference to the following Economist article.

3) Cite three examples of price discrimination you have encountered since the beginning of the semester.

4) Very Difficult Question: Suppose a company has a monopoly on suitcases. The market is characterized by:

Marginal Cost of Supply: MC = 250

Marginal Willingness to Pay among Women: P = 1000 – Q

Marginal Willingness to Pay among Men: P = 500 – Q

Where Q is the number of suitcases (in thousands).

A) Suppose the firm can price discriminate among men and women. What are the equations for the marginal revenue curves in the two markets?

B) What are the equilibrium prices and quantities of suitcases purchased by men and women?

C) How much welfare does this market generate? (i.e., what is the total consumer and producer surplus in the markets?)

D) Now suppose the firm cannot price discriminate. What is the equilibrium price and quantity of suitcases sold? What is the welfare generated? (Hint: draw sketches of the market among men and women to find the total market demand first.)

E) Suppose the government allows citizens to vote on whether or not price discrimination in this market will be allowed. If individuals vote according to their own self interest (and not according to the interest of their spouses, children, etc.), do you think price discrimination will be legal? From society’s point of view, is this a good or poor decision (for this example)?