2. (8 points) For Each of the following observations, check to see if the choice
ID: 1206137 • Letter: 2
Question
2. (8 points) For Each of the following observations, check to see if the choices satisfy the Weak Axiom of Revealed Preference (WARP). If it does satisfy WARP, give as much information about the consumer’s ranking of the bundles as possible. If it violates WARP, simply write “It violates WARP”.
a)
Observation
PX
PY
X
Y
1
3
1
2
4
2
1
4
4
1
3
3
2
2
3
b)
Observation
PX
PY
X
Y
1
1
5
3
2
2
3
2
2
1
3
2
4
1
4
3. (18 total points) ) Suppose there are two types of consumers. The demand for each type of consumer is given by:
Type A: Q = 70 – 2P
Type B: Q = 60 – 3P
Suppose a monopolist has constant marginal cost = 6. Also, for parts a-b, assume that the monopolist is unable to distinguish between the two types of consumers.
a) (4 points) What price should the monopolist charge?
b) (2 points) How much profit will this monopolist make?
Now suppose the monopolist is able to distinguish between the two types of consumers and can effectively price discriminate between them.
c) (4 points) What price should the monopolist charge to each type of consumer?
Price to type A consumers:
Price to type B consumers:
d) (4 points)How much total profit does the price discriminating monopolist make?
e) (2 points) Calculate the price elasticity of demand for Type A consumers at the monopolist’s profit maximizing price.
f) ) (2 points) Calculate the price elasticity of demand for Type B consumers at the monopolist’s profit maximizing price.
Observation
PX
PY
X
Y
1
3
1
2
4
2
1
4
4
1
3
3
2
2
3
Explanation / Answer
Weak axiom of revealed preferences claims that a consumer prefers more of a commodity if he can afford both of them.
In case 1, consumer is satisfying this axiom as he is more of a commodity as compared ot less of it but only when he can afford both. In case 2, nothing can be said as al combination need different combination of income.
Answer2: If monopolist is unable ot distinguish between two types fo consumers, then he should charge same price from both and in this case, we need to find market demand which is sum total fo demand of two consumers.
It is equal to 70-2P +60-3P= 130-5P
At equilibrium MR = MC
Demnd curve is AR accordingly AR = 130-0.2Q
TR = 130Q-0.2Q2
MR = 130-0.4Q
At equilibrium MR=MC
130-0.4Q = 6
0.4Q = 124
Q = 124/0.4 = 310 units
Price = 130-0.2(310) 130-62 = $68
Profit = TR-TC
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.