Question

Question 4 [20 marks] Analyze if the statements that are presented below are True or False. You MUST justify your answer to get credit. Answers without justification (even if they are correct) will be given zero marks.

(a) In any Pareto-optimal allocation of a two-good economy, each consumer has to consume a positive amount of both goods.

(b) A monopolist never produces on the elastic segment of its average revenue curve.

(c) If a firm’s production exhibits increasing returns to scale, then the firm’s marginal costs are decreasing and below its average costs.

(d) Maroon Theater practices third-degree price discrimination and sells tickets to three groups of customers: students, regular customers and senior citizens. The inverse demand of the three groups is linear. Furthermore, the students’ and senior citizens’ elasticities of demand for tickets are −4 and −3, respectively. Because the price charged to regular customers is greater than the price charged to senior citizens, we know with certainty that the ticket price for students will be lower than the ticket price for regular customers.

Answer 1

a) The statement is true, as all the consumers must consume positive amount of both goods for a pareto-optimal allocation of a two-good economy.

b) A monopolist always produces on the elastic segment of its average-revenue curve, Thus, the given statement is false.

c) The given statement is true, as under increasing returns to scale, firm produces at an increasing rate. Here, both MC and ATC falls but fall in MC is less than the fall in ATC.

d) The statement is correct. A price discriminating monopolist charges a higher price in a lower price-elastic market and vice-versa. This means that price charged by students is lower than the price charged by senior citizens. Again, as price charged by regular customers is greater than the price charged by senior citizens, we can say that, the price charged by the students is the lowest among the three groups (followed by senior citizens and regular customers in an increasing order).