Question

The Westview Mall rents space to clothing stores and charges shoppers an entry fee to get into the mall. All clothing stores are identical and all shoppers are identical. Answer the following questions, using a graph that shows the supply and demand for clothing:

1. If the mall rents space to several competitive clothing stores, how much can it collect in rent? How much can it collect in entry fees? How much can it collect altogether?

2. If the mall rents space to a single monopoly clothing store, how much can it collect in rent? How much can it collect in entry fees? How much can it collect altogether?

3. Would you advise the Mall owner to rent to several competitive stores or to one monopoly? Why?

4. Copy centers usually give substantial discounts to customers with large orders. Do you think they are price discriminating? Why or why not?

5. True or False: Because a monopolist is able to charge a higher price than a perfectly competitive firm, his marginal revenue is higher than what a perfectly competitive firm’s would be.

6. The RH Snippet company has one president and 1000 assembly line workers. Which of the following events would have a bigger impact on the price of Snippets and why? a) The president gets a raise of $1,000,000 a year. b) A new union contract raises each worker’s wages by $1,000 a year, but allows the firm to fire as many workers as it wants to.

*****How do you answer 1-3 using a graph, please show me the correct answer with graph*****

Answer 1

1. Optimal rental price is determined by:

a. Supply: Here number of stores available for rent is constant, so supply curve is a vertical line - fixed at, say, q = Ks

b. Demand: Demand for clothing stores is determined by potential profitability i.e. return-on-investment (ROI) of the expended rent, which in turn is primarily determined by traffic to Westview mall.

In the absence of an Entry Fee traffic is maximum, and is determined by parameters like affordibility, quality and variety of clothes stocked by the individual clothing stores which are exogeneous for the Mall owner i.e. not part of the Mall owner's set of decision variables. Let's call this starting (maximum traffic) exogeneous Traffic or just uppercase T.

Let us assume for simplicity that for a constant level of exogeneous traffic => profitability => demand for rental stores the demand function is r = a - bq.

Combining with supply function q = Ks, r = a - bKs.

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The Entry Fee amount which can be charged can be captured in a demand function.

For entry fee E = 0, traffic is maximum at T. Thus the demand function can be written as E = T - cn, where c is a parameter and n is the traffic at a given level of entry fee.

In reality the rental demand function parameters (a , b) are influenced by traffic ( n ) to the mall - higher traffic to the mall, higher demand for rental space in the mall. Let's assume the Mall owner and clothing firms have decided on an optimal traffic n* which keeps the rental demand parameters at a constant (a, b).

This yields E* = T - cn*.

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Of course, the decision of Entry fee and Rental Price may be outcomes of one larger plan to maximize revenue.

Here, the Mall owner's Total Revenue = [ nE + (Ks)*{ a(n) - b(n)Ks} ].

If we have the the functions a(n) and b(n) available, we can find optimal traffic n* - and thus also optimal Entry Fee and Rental Price - by setting the first derivative of TR to 0 (FOC of economic optimization) and checking the SOC if needed.

BUT as a monopolistic supplier of rental space in the mall, the owner can also practice price discrimination - a major advantage of having many buyers - and thus capture a greater share of consumer's (here renter's) surplus.

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Q2) If the mall rents out the property to a single monopoly, price discrimination is not possible because the mall owner essentially sells one big unit cluster of rental spaces. The process of determining (r, E) follows exactly as shown in the first picture above.

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Q3) Given the possibility of capturing additional surplus by price discrimination, it would be advisable for the Mall owner to rent to several competitive stores.

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Q4) Price discrimination is the case when a firm can charge indentical different prices in an attempt to extract as much profit as possible. The consumers who'd pay more i.e. the consumers who can be located on the up-and-left part of the demand curve are charged more.  

There are 3 criteria that must be met for price discrimination:

the firm must have market power,

the firm must be able to recognize differences in demand,

and the firm must have the ability to prevent arbitration, or resale of the product.

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Where a firm has market power, we say it has monopolistic influence i.e. it controls not only output quantity but also market price by restricting or expanding output. As such, industries fall on a spectrum between Perfect Competition and pure Monopoly. In short, a a firm with monopolistic influence sets the price-quantity vector ( p, q).

Because copy centers can set price and quantity, they do have monopolistic influence - a fact which is captured by a downward sloping MR curve. Like a monopolist, the Copy Center decides ( p , Q) by equating MR with MC yielding (p1, Q1).

However in the movement down the demand curve ( 1 unit sold, 2 unit sold . . . ) the (initial) low volume customers are charged MORE than p1, capturing some or all of their consumer's surplus. It is with the high-volume customers that some of the consumer's surplus is left with the consumer (by passing on some of the "extra" producer's surplus generated due to diminishing marginal cost)

So indeed, this IS an example of price discrimination.

Q5) TRUE; in long run perfectly competitive equilibrium, the firm's demand curve and MR curve are both horizontal and equal to the minimum possible MC in the industry. Firm's undercut each other until only the lowest cost producers survive to sell and sell at marginal cost.

Q6) Assuming that wage or salary does not affect productivity / efficiency, to supply the same quantity of Snippets either the same or a different input mix of capital and labor has to be chosen to stay on the same isoquant. However, labor cannot be substituted by capital here in the absence of additional information. This means that the same labor and capital inputs have to be retained.

President's increase = 10^6

Worker's increase = 10^3

By dividing, we see that if there are more 10^3 workers only then does the increase in total labor cost exceed the increase in president's salary.

So depending on whether there are more or less than a thousand workers, (b) will have a greater or lesser impact.