ECN 453 Fall 2017 HOM EVORK SET # 9: DUE Tuesday, November 14, 2017 (Total Point
ID: 1108533 • Letter: E
Question
ECN 453 Fall 2017 HOM EVORK SET # 9: DUE Tuesday, November 14, 2017 (Total Points-14) (NOTE: BE SURE TO MAKE YOURSELF A COPY OF YOUR ANSWERS) Question (1): Your firm produces two products, and there are four consumers with the following demands or reservation prices (i.e., maximum amount each customer is willing to pay for the respective products): Consumer Good #1 (S) 25 40 Good E2(S) 100 80 40 25 100 Keep your answers in full dollar values (i.e., no cents). A. If both goods are produced at zero marginal cost, then are sold separately, what are the optimal prices (P,and P,)and what will be b. if the goods are sold as a pure bundle, what is the optimal bundle price and what will be the a if the goods are sold separately, what are the optimal prices (P,-and P and what will be b. if the goods are sold as a pure bundle, c. if the goods are sold with mixed bundling, what will the optimal prices (P, - .P,-, the total profit? total profit? the total profit? total profit? and bundle price B. Now suppose that the production of each good entails a marginal cost of $30, wts the optimal bundleprice and what will bethe and what will be the total profit? Question (2): Consider a market in which there are 10 identical customers and assume that each consumer has demand P- 100-2q. Currently, there is an existing firm (with MCx-20) that charges a competitive price to each customer. Now, consider a potential entrant into this market that has MCE 18. According to the Chicago School Theory, the existing firm would not use an exclusive deali contract to foreclose (i.e., to prevent the entry) of the more efficient potential entrant. However, a counter argument to the Chicago School Theory considers the possibility that an exclusive dealing contract could be used to "Extract Surplus From Some Buyers" and, in doing so, the existing firm could use an exclusive dealing contract to block the entry of a more efficient potential entrant. Using the above demand and cost information, explain whether an exclusive dealing contract could be used to enhance the wealth of the existing firm and also foreclose the entry of a more efficient potential entrant under the following two conditions: A. for the potential entrant, the fixed cost of entry K401 B. for the potential entrant, the fixed cost of entry K-301Explanation / Answer
A)
a)MC=0; Reservation prices are the additional amounts a consumer is willing to pay for an additional unit of the good. So the optimal prices of Good 1 and 2 will be where P1= 25 and P2=100 and also where P1=100 and P2=25. Total profit under each case=125 dollars.
b) If the goods are sold as a pure bundle then Good 1 and Good 2 will be sold with optimal prices P1=25 and P2=100 and also P1=100 and P2=25.
B)
a) Where marginal cost =30 dollars, we will try to pick those optimal prices where Marginal benefit and marginal cost equate the closest. So P1=40 and P2=80 as well as P1=80 and P2=40. The total profit=120-(30+30)=60.
b) In bundle the optimal prices will be (40,80) and (80,40)
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