Question

Question 1:

A football club is the only one in its region and is therefore able to behave like a monopolist.

It sells tickets to Adults (?) and Juniors (?), whose demand curves are given by:

?_! = 100−?_!

?_" = 80−?_"

Additionally, the club’s total costs are given by ?? = 10?

1. Initially, the club sets its price by charging all supporters the same price, according to the aggregate market demand curve. Calculate the maximising output, price and the resulting profit for the club as well as consumer surplus.

2. The club hires an economist to consider its pricing strategy and receives the advice that it should charge different prices to each type of supporter. Find the prices it sets in both markets, the sales (output) in each and its overall level of profit and illustrate profit maximising outputs and prices of each consumer type on a graph (one graph for each type of consumer). Calculate consumer surplus in this case.

3. What conditions must be satisfied for a producer to be able to implement a policy of price discrimination?

Question 2:

The following table presents the price, output and profits for identical firms at industry and firm level. Suppose there are currently four firms in the market and two are proposing to merge (firm 3 and 4). Assume that the remaining three (the one merged firm plus the two unmerged firms) continue to exhibit Cournot behavior.

a) Explain the merger paradox using data from the table below. How the merged firm (firm 3 and 4) will be worse off?

b) How would this outcome differ if all four firms merged?

c) Explain what is the motivation for two firms to merge.

Number of Firms	Price	Industry level		F	irm level
		Output	Profits	Output	Profits
1	58	21	1092	21	1092
2	44	28	1064	14	532
3	37	31.5	976.5	10.5	325.5
4	32.8	33.6	900.48	8.4	225.12

Output is measured in thousands of units and profits are measured in thousands of pounds per week.

Question 3:

Consider a market with two identical firms, Firm A and Firm B. The market demand is ? = 20−^#$ ?, where ? = ?_% +?_& . The cost conditions are ??_% = ??_& = 16.

a) Assume this market has a Stackelberg leader, Firm A. Solve for the quantity, price and profit for each firm. Explain your calculations.

b) How does this compare to the Cournot-Nash equilibrium quantity, price and profit? Explain your calculations.

c) Present the Stackelberg and Cournot equilibrium output using a diagram.

4. The crude oil market can be described as a Nash-Cournot market, in which Saudi Arabia acts as Stackelberg leader. Do you agree with this statement?

Answer 1

C . Conditions for price discrimination are

i. The demand curves in the different (two or more) market segments should not be iso elastic. When elasticity is different than only price discrimination is profitable.

ii . There should not be resale of the good produced by the monopolist.