having some trouble with this question. Can you please explain how to do this? T

Question

having some trouble with this question. Can you please explain how to do this?

The demand curve for product 1 is Q1-100-p. Demand for product 2 is fixed at 1,000, provided p2 S 14. If good 1 is produced on its own, fixed costs are $2,000 and marginal cost is $20. If good 2 is produced on a stand-alone basis, fixed costs are $3,000 and marginal cost is $10. If the two products are produced together, total fixed costs are $4,500 and the marginal costs are unchanged. 3. a. What are the Ramsey prices? b. Are the Ramsey prices subsidy free? Explain

Explanation / Answer

The Ramsey problem, or Ramsey–Boiteux pricing, is a Second best policy problem concerning what price a public monopolist or a firm faced with an irremovable revenue constraint should set, in order to maximize social welfare. A closely related problem arises in relation to optimal taxation of commodities.

In a First best world, the optimal solution would be to use prices equal to marginal cost and charge an optimal lump-sum charge that would cover the fixed cost or revenue requirement. Nevertheless, this is usually impossible to implement, thus price distortion is inevitable.

This principle is applicable to pricing of goods that the government is the sole supplier of (public utilities) or regulation of natural monopolies, such as telecommunications firms. It is also applicable to situations where there is perfect competition in the private sector, but the government needs to distort the prices of the goods it provides in order to break even, or to earn a profit. In this case the "constraint" is that the revenue requirement cannot be covered by a lump-sum tax, so prices must be distorted.

Related Questions

Navigate

• Browse (All)
• Browse H
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.