only anwser the (e,f,g) Suppose that you are putting on a wine-tasting festival
ID: 1132187 • Letter: O
Question
only anwser the (e,f,g)
Suppose that you are putting on a wine-tasting festival for the bourgeoisie of Eugene. Having done extensive research into the characteristics of each possible attendant and the costs to provide to each attendant, you come to the following conclusions about your costs and each individual's demand: D(p) 100 where C() is the cost to provide q samples of wine and D(p) is each consumer's demand for wine samples given the price you set p. Because your wine-tasting festival is so far superior to every other festival in the area, you essentially have monopoly over each incredibly wealthy attendant (This is just a story to motivate the ridiculously high numbers you'll get) a) Calculate the price elasticity of demand in this market as a function of only p b) Calculate the profit you would earn if you priced each sample of wine monopolistically, and state the price per wine sample and total number of samples each consumer will have If the number of wine samples shocks you, just remember that people spit wine out at wine tastings. c) Suppose further that you decide that you want to charge an entry fee into the wine- tasting festival. Given that you are still pricing wine samples monopolistically, what is the highest ticket price you can charge the bourgeoisie of Eugene? Also, discuss how this entry fee relates to consumer surplus d) What is the total profit (from both the ticket and the sale of wine samples) you expect to earn from each attendant if you charge the maximum possible ticket price?Explanation / Answer
answer-
(e)The monopolist, if applies the two-part tariff structure, will set the price per unit equal to the marginal cost. Hence, [p = MC] or [400 - 2q = 20] or [q^*=190] units. The competitive price is indeed at where price is equal to the marginal cost. Hence, the price will be setted as $20.
(f)The highest ticket price that will be charged in this case is the price corresponding to demand curve above the marginal cost, ie A to F minus $20 (the equilibrium price, which is equal to the marginal cost).
(g)The product profit of one unit can be found as [p - AC] , where AC is average cost. The average cost is [AC = rac{C(q)}{q} = 20] , and hence the profit per product is [20 - 20 = 0] dollars. Thus, the sale profit is [0*q^* = 0] dollars.
The acces fee profit, however, is the total consumer surplus. The CS in this case is [ rac{1}{2}base.height = rac{1}{2}190(400-20)] (as the higest price in the demand curve is $400 and current price is $20, also the base of the triangle will be the quantity sold) or [ rac{1}{2}base.height = 36100] dollars. Thus, the total profit is $0 + $36100, or $36100.
This arrangement is indeed more profitable. The reason is that, in two-part tariff structure, the deadweight loss that occurs in normal monopoly priceing, is included as profit in this sceme. The normal monopoly pricing led to a deadweight loss of area ENF. But that same area, which becomes the consumer surplus if no ticlet is charged, is included as profit in two-part tariff structure. That is why this stratergy is more profitable for the monopolist.
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