1. You are an agent for a popular musician (take your pick, Taylor Swift, Beyonc
ID: 1122605 • Letter: 1
Question
1. You are an agent for a popular musician (take your pick, Taylor Swift, Beyonce, Bruno Mars). You need to set ticket prices for concert with you can choose to sell anything below that attendee count. You face the following demand a maximum limit of 5,000 attendees, but for the show. Assume you don't have to worry about f fixed costs and the venue is providing all the security and event management personnel. You will notice that your marginal costs of I to your average costs. This occurs when there are no (or very small) costs to increasing production (in this case production of tickets) Price and cost 100 54 Marginal Marginal cost average cost 2.000 4,000 Assume you must charge one price for tickets. If you maximize profit, how many tickets will you choose to sell and what is your total profit? Assume you can charge multiple prices for tickets and that you are an economic superman, with the ability to know exactly how much each person is willing to pay What is your profit now? a. b.Explanation / Answer
The monopoly is characterized by single firms producing all the industry output at a price that is determined through demand curve facing the monopolist. The monopolist has market power to influence the market price. The monopolist determines its equilibrium quantity by equating marginal revenue with marginal cost. The equilibrium price corresponding to the equilibrium quantity is determined from demand curve facing the monopolist.
The singers or artists are sole provider of favourite music to their firms and hence enjoys monopoly power. In this case the monopolist equilibrium occurs where MR=AC=3 line cuts the MR curve at Q=2000. The market price for this amount of tickets is $54 per ticket. Then the profit of the firm is area B and is equal to 2000*(54-3)=$102000.
b)
Now suppose that the firm perfectly price discriminate. The firm will charge each customer a different price. The equilibrium quantity will be where the MC=AC=3 line cuts the demand curve at Q=4000. The firm can provide this amount without making any loss. As the firm charges each ticket to the customer with highest bid or the price defined by the demand curve for that quantity, the firm is able to extract all the consumer surplus generated at Q=4000. The profit of the firm is given by the area A+B+C and amounts to 0.5*(100-3)*4000=$194000
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