the entire work. egree price discrimination? Identify the market conditions requ
ID: 1127836 • Letter: T
Question
the entire work. egree price discrimination? Identify the market conditions required for a successful implementation of this market strategy. tbjSuppose a utility firm is able to practice third degree price discrimination by selling its pr duct to factories (market #1 and private residences market #2 The demand curves in both markets and the total cost curve are described by the following equations: P1=608-6Q1 P2=478-5Q2 TC=425 + 8Q where Q = Q1 +Q2. OFind the profit maximizing output in each market. () What price would the firm charge in each market? (m)Compute the profit (if any) the firm would earn if both markets clear. (v)Find the price elasticity of demand in both markets and comment on how they relate to the relative prices charged in the segmented markets. (2Ma)JAssume someone claims that the market for commodity X is perfectly competitive, what questions would you ask to check the validity of such claim? Explain your answer. (b)Suppose the claim is true and firms in this industry are earning short run economic profits explain, with appropriate graphical illustration(s), the market transition from this level of profits to long run equilibrium where economic profits are zero. (3)(a)One of the major characteristics of monopolistic competitive markets is that firms in this industry produce "differentiated" products. What does this mean? Suppose a friend plans to set up a "Dry Cleaning" business and requests your advice concerning ways he could differentiate his services from those of his competitors what advice would you give? (b)Assume conditions for its brand of product. a firm in a monopolistic competitive market faces the following demand and supply P-1400-7.5Q TC=Q-6Q + 140Q + 750 (0)What is the firm's fixed cost? How did you know?Explanation / Answer
1)
a). The 3rd degree PD is practice of charging different price to different market for the same goods.
Now, for successful implementation of this PD, both market should have different demand curves, that is both should different elasticity or should have different willingness to pay. Finally both market should have willingness to pay more than MC.
b). Now, lets assume that the demand curve of the 2 different market is given, => P1 = 608 – 6*Q1,
=> MR1 = 608 – 12*Q1, similarly P2 = 478 – 5*Q2, => MR2 = 478 – 10*Q2, and have TC=425+8*Q,
=> MC = 8.
So, in 3rd degree PD the optimum quantity of production in each market is determined by, “MR1=MR2=MC”. So, by MR1+MC, => 608 – 12*Q1 = 8, => 12*Q1 = 600, => Q1 = 50.
Now, by MR2=MC, => 478 – 10*Q2 = 8, => 10*Q2 = 470, => Q2 = 47.
So, the profit maximizing output in each market is given by, “Q1=50 and Q2=47”.
ii)
the demand curve of market-1 is, “P1 = 608 – 6*Q1 = 608 – 6*50 = 308”, =>P1=308. Now, the demand curve of market-2 is, “P2 = 478 – 5*Q2 = 478 – 5*47 = 243, => P2 = 243.
So, in market-1 the monopolist will charge “P1=308” and in 2nd market monopolist will charge “P2=243.
iii).
So, the total profit earn by the monopolist is, Profit = P1*Q1 + P2*Q2 – C.
=> Profit = 308*50 + 243*47 – [425 + 8*(50+47)] = 26,821 – (425 + 776) = 26,821 – 1201 = 25,620.
=> Profit = 25,620.
iv).
Now, the demand curve of the 1st market is given by, “P1 = 608 – 6*Q1, dP1/dQ1 = (-6), => the price elasticity is given by, “e1 = (-6)*(P1/Q1) = (-6)*(308/50) = (-36.96).
Now, the demand curve of the 2nd market is given by, “P2 = 478 – 5*Q1, dP2/dQ2 = (-5), => the price elasticity is given by, “e2 = (-5)*(P2/Q2) = (-5)*(243/47) = (-25.85).
So, since 36.96 > 25.85, => the 1st market is more elastic compared to the 2nd market. Since the 1st market is more elastic => it is more sensitive compared to the 2nd market, => as “P” will increase by 1% in the both market, => the percentage quantity reduction in the 1st is more than 2nd one.
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