Econ 100C, Problem Set 2

1. Grocery stores often set consumer-specific prices by issuing frequent-buyer cards to willing
customers and collecting information on their purchases. Grocery chains can use that data to
offer customized discount coupons to individuals.
a. Which type of price discrimination—first-degree, second-degree, or third-degree—are
these personalized discounts?
b. How should a grocery store use past-purchase data to set individualized prices to maximize
its profit?

2. Suppose that the quantity-discriminating monopoly can set three prices, depending on the
quantity a consumer purchases. The demand function is 𝑄 = 90 − 𝑝. The firm’s profit is
𝜋 = 𝑝1 𝑄1 + 𝑝2 (𝑄2 − 𝑄1 ) + 𝑝3 (𝑄3 − 𝑄2 ) − 𝑚 𝑄3
where 𝑝1 is the high price charged on the first 𝑄1 units (first block), 𝑝2 is a lower price charged
on the next 𝑄2 − 𝑄1 units (second block), 𝑝3 is the lowest price charged on the remaining 𝑄3 −
𝑄2 units (third block), 𝑄3 is the total number of units actually purchased, and m=$30 is the
firm’s constant marginal and average cost. Use calculus to determine the profit-maximizing set
of prices.

3. A patent gave Sony a legal monopoly to produce a robot dog called Aibo. The Chihuahua-size
pooch robot can sit, beg, chase balls, dance, and play an electronic tune. When Sony started
selling the toy in July 1999, it announced that it would sell 3,000 Aibo robots in Japan for about
$2,000 each and a limited litter of 2,000 in the United States for $2,500 each.

Suppose that Sony’s marginal cost of producing Aibos is $500. Its inverse demand curve is 𝑝𝐽 =
𝑄𝐽
3500 − 2
in Japan and 𝑝𝐴 = 4500 − 𝑄𝐴 in the United States. Solve for Sony’s optimal prices
and quantities (assuming that U.S. customers cannot buy robots from Japan). Show how the
profit-maximizing price ratio depends on the elasticities of demand in the two countries. What
are the deadweight losses in each country, and in which is the loss from monopoly pricing
greater?

4. True or false, explain your answer. If all consumers have identical tastes and preferences,
perfect price discrimination is impossible.

5. A monopolist has the cost function of C(Q) = 250 + Q2. Inverse market demand is equal to P(Q) =
90 – 4Q.
a. Assuming uniform pricing, find the monopolist’s profit maximizing price and quantity. What
is the firm’s profit?
b. If the monopolist can practice first degree price discrimination, calculate the profit
maximizing output, profit and consumer surplus. Explain pricing in this situation.
c. In this particular situation would the first degree price discrimination be more desirable to
society than uniform pricing? You don’t have to provide any calculations but briefly explain.
6. A monopolist has the cost function C(Q) = 2Q. The market inverse demand in one market is
given by P1(Q1) = 60 – 2Q1. The market inverse demand in another market is given by P2(Q2) = 60
– 4Q2. Arbitrage between these markets is not possible and the monopolist is free to charge
different prices in these two markets.
a. What is the monopolist’s profit function?
b. Assuming no shutdown, find the monopolist’s profit maximizing price and quantity for
each market.
c. How do we know the monopolist would be no better off if she was forced to charge a
uniform price?
d. Which consumers would be better off if the monopolist was forced to charge a uniform
price? Which would be worse off?

7. Tuan lives in a town with only one movie rental store. Suppose Tuan’s demand for movie rentals
per month is Q = 16 – 2P. The movie store currently charges $5 per movie, but is thinking of
adding a flat monthly cardholder fee, and dropping the price to $2 per rental. At this new price,
what is the largest cardholder fee that Tuan will pay? If the rental store has a constant marginal
cost of $2, which strategy is more profitable?

8. A monopolist sells a product in a market with 20 identical consumers. Each consumer has the
inverse demand function P(q) = 10 – q. The monopolist’s cost function is C(Q) = 2Q, where Q is
the aggregate quantity produced.
a. Find the efficient level of output.
For parts b and c assume the monopolist only charges a uniform price.
b. Find the monopolist’s profit maximizing choice of Q and P.
c. What are the values of consumer surplus, producer surplus and deadweight loss?
For parts d and e assume the monopolist charges the profit maximizing two-part tariff.
d. Find the profit maximizing quantity sold per consumer, fixed fee and per-unit price.
What quantity is sold in the market?
e. What are the values of consumer surplus, producer surplus (profit) and deadweight
loss?

9. Knoebels Amusement Park in Elysburg, Pennsylvania, charges a lump-sum fee, L, to enter its
Crystal Pool. It also charges p per trip down a slide on the pool’s water slides. Suppose that 400
teenagers visit the park, each of whom has a demand function of q1 =5 – p, and that 400 seniors
also visit, each of whom has a demand function of q2 =4 – p. Knoebels’ objective is to set L and p
so as to maximize its profit given that it has no (non-sunk) cost and must charge both groups the
same prices. What are the optimal L and p?