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1. Qantas sells tickets through conventional travel agents, online intermediaries, its own telephone call center, and its own website. Typically, an airline’s cost per transaction is lowest for bookings through its own website and highest for bookings through conventional travel agents. Qantas’s cheapest fare, the Red e-Deal, is only available for online booking.
a) What conditions are necessary for a firm to be able to price discriminate?
b) How does technology affect an airline’s ability to discriminate on price?
c) Considering Qantas’s cost of bookings and traveler’s elasticity of demand, explain why the airline offers the Red e-Deal only through online booking.
d) Qantas priced the Red e-Deal for flight QF403 from Sydney to Melbourne, on July 20, 2011, at $199 for travelers originating in Sydney, and at $175 for travelers originating in Melbourne. How does this make sense?
2. A monopolist has a constant marginal cost and average cost of $10 and faces a demand curve of Qd = 1000 – 10 P. Marginal Revenue is given by MR = 100 – 1/5 Q.
a. Calculate the monopolist’s profit maximizing quantity, price, and profit.
b. Graphically illustrate the demand curve, marginal revenue curve, marginal cost curve, and average cost curve. Be sure to label all intercepts and axes.
c. Mark the profit maximizing Price and Output level.
d. Now suppose that the monopolist fears entry, but thinks that other firms could produce the product at a cost of $15 per unit (constant MC and AC) and that many firms could potentially enter. How could the monopolist attempt to deter entry, and what would the monopolist quantity and profits be now? Would you recommend this strategy?
3. Microsoft offers special discounts to students. Other publishers have developed special “student” versions of their software with fewer features than the regular packages.
a. Is this a form of price discrimination? Explain your rationale.
b. Why do publishers offer discounts to students?
c. What is the purpose of developing less powerful “student” editions?
d. Should software publishers also offer discounts to senior citizens or develop “senior citizen” editions? Explain.
4. Dayna’s Doorstops, Inc. (DD) is a monopolist in the doorstop industry. Its cost is
C = 100 – 5Q + Q2 and demand is P = 55 -2Q. MC = -5 + 2Q and MR = 55 – 4Q.
a) What price should DD set to maximize profit? What output does the firm produce? How much profit and consumer surplus does DD generate?
b) What would output be if DD acted like a perfect competitor and set MC = P? What profit and consumer surplus would then be generated?
c) What is the deadweight loss from monopoly power in part a)?
5.Suppose that individual demand for a product is given by QD = 1000 – 5P. Marginal revenue is MR = 200 – 0.4 Q, and marginal cost is constant at $20. There are no fixed costs.
a. If this firm was a single price monopolist, what price would they charge? Show your work.
b. The firm is now considering a quantity discount. The first 400 units can be purchased at a price of $120, and further units can be purchased at a price of $80. How many units will the customer buy in total?
Show that the second degree price discrimination scheme is more profitable than a single monopoly price.
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