Question

1. Suppose a secondary good is supplied in competitive market. A monopolist supplies the market for the primary good. The demand for the primary good is unitary (either 0 or 1), the marginal cost of producing the primary good is zero. The market for the secondary good has two types of consumers: those in proportion λ have inverse demand schedule ?? = 5 − 1 2??, while the remaining 1 − λ have inverse demand ?? = 10 − ??. Normalize the total number of consumers to 1, and let c = 2 be the constant marginal cost for the secondary good. a) Explain why there might be an incentive for tying. b) Assume the monopolist is allowed to tying the products. What is the optimal price of the primary good when only high demand consumers purchase the good? What is the price of the secondary good? c) If λ=.5, what is the price of optimal price for the primary and for the secondary price? Does the monopolist supply both types of consumers?

Answer 1

a)

Primary goods

Primary products are goods that are available from cultivating raw materials without a producing process. Significant primary product industries include agriculture, fishing, mining, and forestry.
Often developing countries have a comparative advantage in producing primary products. This is because many developing countries (e.g. in Africa are rich in resources, but poor in capital and education). Therefore, they will mine and export primary products to realize revenue.

Low-income elasticity of demand

As income increases, demand for several food stuffs doesn’t really increase. As incomes increases, demand for tea, coffee and sugar don’t increase that much. Therefore, countries who believe primary products may have lower income growth than countries producing manufactured goods, with a better income elasticity of demand.

Finite Resources

Primary products like metals, oil and gas are finite resources. Therefore, there's always a danger that when these resources are exhausted, the economy will lose its main export revenue.

Price Volatility
The price of primary products tends to be far more volatile. e.g. they can be influenced by weather and speculation. These prices changes can be damaging to countries. If prices fall and demand is price inelastic, then producers can leave of business and therefore the country loses its main sort of export revenue.

Lack of investment in education

Production of primary products is usually unskilled labor (mining, agriculture). Therefore an economy that speciales in primary products may fail to possess enough incentives to take a positioning labor productivity which helps the long-term performance of the economy.

Secondary goods

In macroeconomics, the secondary sector of the economy is an economic sector within the three-sector theory which describes the role of producing. It encompasses the industries which produce a finished, usable product or are involved in construction.
This sector generally takes the output of the first sector (i.e. raw materials) and creates finished goods suitable to be used by other businesses, for export, or purchasable to domestic consumers (via distribution through the tertiary sector).

Many of those industries consume large quantities of energy and need factories and machinery; they' often classified as light or heavy supported such quantities. They also produce waste materials and waste heat which will cause environmental problems or cause pollution (see negative externalities). Examples include textile production, car manufacturing, and handicraft.
Manufacturing is a crucial activity in promoting economic process and development. Nations that export manufactured products tend to get higher marginal GDP growth which supports higher incomes and marginal tax income needed to fund quality-of-life initiatives like health care and infrastructure in the economy. The field is a crucial source for engineering job opportunities. Among developed countries, it's a crucial source of well-paying jobs for the center class to facilitate greater social mobility for successive generations on the economy. Currently, an estimated 20% of the labor pool within the us is involved within the secondary industry.

The secondary sector depends on the first sector for the raw materials necessary for production. Countries that believe agriculture and other raw materials i.e. (primary sector), grow slowly and remain under-developed or developing economies. The value addition after the processing of products creates for higher profitability, which accounts for the expansion of developed economies.

Price discrimination

Price discrimination happens when a firm charges a special price to different groups of consumers for a uniform good or service, for reasons not related to costs of supply.

• Charging different prices for similar goods is not pure price discrimination.
• Product differentiation gives a supplier greater control over price and the potential to charge consumers a premium price arising from differences in the quality or performance of a product.

Differences in price elasticity of demand:

There must be a special price elasticity of demand for every group of consumers. The firm is then ready to charge a better price to the group with a more price inelastic demand and a lower cost to the group with a more elastic demand. By adopting such a technique , the firm can increase total revenue and profits (i.e. achieve a higher level of producer surplus). To profit maximise, the firm will seek to line marginal revenue = to incremental cost in each separate market.

b)
Barriers to stopconsumers switching from one supplier to another: The firm must be ready to prevent "consumer switching" – i.e. consumers who have purchased a product at a lower cost are ready to re-sell it to those consumers who would have otherwise paid the expensive price.
This can be wiped out variety of the way , – and is perhaps easier to realize with the supply of a singular service like a haircut, dental treatment or a consultation with a doctor instead of with the exchange of tangible goods like a meal during a restaurant.
• Switching might be prevented by selling a product to consumers at unique moments in time – for example with the use of airline tickets for a specific flight that cannot be resold under any circumstances or cheaper rail tickets that are valid for a selectedrail service.
• Software businesses often offer heavy price discounts for educational users providing they give an academic email address
• Students may be required to show proof of identification using secure ID cards
Price discrimination is easier when there are separate and distinct marketsfor a firm's products and when price elasticity of demand varies from one group of consumers to another
Perfect Price Discrimination is charging regardless of themarket will bear
• Sometimes known as optimal pricing, with perfect price discrimination, the firm separates the market into each individual consumer and charges them the price they are willing and able to pay
• If successful, the firm can extract the entire consumer surplus that lies underneath the demand curve and turn it into extra revenue or producer surplus.
• This is hard to achieve unless a business has full information on every consumer's individual preferences and willingness to pay. The transactions costs involved findout through marketing research what each buyer is ready to pay is that the main barrier to a business's engaging during this sort of price discrimination.
• If the monopolist can perfectly segment the market, then the average revenue curve becomes the marginal revenue curve.
• A monopolist will continue to sell extra units as long as the extra revenue exceeds the marginal cost of production.

In reality, most suppliers and consumers like better towork with tariffs and menus from which trade can happen instead of having to barter a price for every unit bought and sold.
When profit-maximizing firms in perfectly competitive markets combine with utility-maximizing consumers, something remarkable happens—the resulting quantities of outputs of productsand services demonstrate both productive and allocative efficiency.

Productive efficiency means producing without waste in order that the selection is on the assembly possibility frontier. In the end of the day during a perfectly competitive market—because of the method of entry and exit—the price within the market is adequate to the minimum of the long-run monetary value curve. In other words, goods are being produced and sold at rock bottom possible monetary value.
Allocative efficiency meansamong the points on the assembly possibility frontier, the purpose that's chosen is socially preferred—at least during a particular and specific sense. In a perfectly competitive market, price is adequate to the incremental cost of production. Think about the worth that's purchased an honest as a measure of the social benefit received for that good; in any case. willingness to pay conveys what the good is worth to a buyer. Then believe the incremental cost of manufacturing the great as representing not just the value for the firm but, more broadly, because the social cost of manufacturing that good.
When perfectly competitive firms follow the rule that profits are maximized by producing at the numberwhere price is adequate to incremental cost. They're ensuring that the social benefits received from producing an honest are in line with the social costs of production.

Let's know their an example to more thoroughly explore what is meant by allocative efficiency. Let's begin by assuming that the marketplace for wholesale flowers is perfectly competitive, Now, consider what it might mean if firms there in market produced a lesser quantity of flowers. At a lesser quantity, marginal costs would not yet have increased as much, so the price would exceed marginal cost.
In this situation, the benefit to society as an entire of manufacturing additional goods—as measured by the willingness of consumers to buy marginal units of a good—would be higher than the value of the inputs of labor and physical capital needed to supply the marginal good. In other words, the gains to society as an entire from producing additional marginal units would be greater than the prices .
On the oppositehand, consider what it might mean if—compared to the extent of output at the allocatively efficient choice.

           They also make sure that the advantages to consumers of what they're buying—as measured by the worth they'rewilling to pay—is adequate to the prices to society of producing the marginal units—as measured by the marginal costs the firm must pay. Thus, allocative efficiency holds.
When we say that a wonderfullycompetitive market within the end of the day will feature both productive and allocative efficiency, we'd like to recollect that economists are using the concept of efficiency during a particular and specific sense, not as a synonym for “desirable in every way”. For one thing, consumers’ ability to pay reflects the income distribution during a particular society. Thus, a homeless may haven't any ability to buy housing because they need insufficient income.

Perfect competition,

            It may be a hypothetical benchmark. For market structures such as monopoly, monopolistic competition, and oligopoly—which are more frequently observed in the real world than perfect competition—firms will not always produce at the minimum of average cost, nor will they always set price adequate to incremental cost . Thus, these other competitive situations won't produce productive and allocative efficiency.
Moreover, real-world markets include many issues that are assumed away within the model of perfect competition, including pollution, inventions of latest technology, poverty—which may make some people unable to pay for basic necessities of life—government programs like national defense or education, discrimination parturient markets, and buyers and sellers who must affect imperfect and unclear information.
The theoretical efficiency of perfect competition does, however, provide a useful benchmark for comparing the problems that arise from these real-world problems.
If perfect competition may be a market where firms haven't any market power and that they simply answer the market value , monopoly may be a market with no competition in the least , and firms have a great deal of market power. In the case of monopoly, one firm produces all of the output during a market. Since a monopoly faces no significant competition, it can charge any price it wishes, subject to the demand curve. While a monopoly, by definition, refers to one firm, in practice people often use the term to explain a market during which one firm merely features a very high market share. This tends to be the definition that the U.S. Department of Justice uses.
Even though there are only a few true monopolies alive , we do affect a number of those few a day , often without realizing it: The U.S. Postal Service, your electric, and garbage pickup companies are a couple of examples. Some new drugs are produced by just one pharmaceutical firm—and no close substitutes for that drug may exist.
From the mid-1990s until 2004, the U.S. Department of Justice prosecuted the Microsoft Corporation for including Internet Explorer because the default browser with its OS . The Justice Department’s argument was that, since Microsoft possessed a particularly high market share within the industry for operating systems, the inclusion of a free browser constituted unfair competition to other browsers, such as Netscape Navigator. Since nearly everyone was using Windows, including Internet Explorer eliminated the incentive for consumers to explore other browsers and made it impossible for competitors to gain a foothold in the market. In 2013, the Windows system ran on quite90% of the foremost commonly sold personal computers. In 2015, a U.S. federal court tossed out antitrust charges that Google had an agreement with mobile device makers to line Google because the default program .
This chapter begins by describing how monopolies are shielded from competition, including laws that prohibit competition, technological advantages, and certain configurations of demand and provide . It then discusses how a monopoly will choose its profit-maximizing quantity to supply and what price to charge. While a monopoly must worry about whether consumers will purchase its products or spend their money on something altogether different, the monopolist needn't worry about the actions of other competing firms producing its products. As a result, a monopoly isn't a price taker sort of a perfectly competitive firm, but instead exercises some power to settle on its market value .

Because of the shortage of competition, monopolies tend to earn significant economic profits. These profits should attract vigorous competition as we described in perfect competition, and yet, due to one particular characteristic of monopoly, they are doing not. Barriers to entry are the legal, technological, or economic process that discourage or prevent potential competitors from entering a market. Barriers to entry can range from the straightforward and simply surmountable, like the value of renting retail space, to the extremely restrictive. For example, there are a finite number of radio frequencies available for broadcasting. Once an entrepreneur or firm has purchased the rights to all or any of them, no new competitors can enter the market.
In some cases, barriers to entry may cause monopoly. In other cases, they'll limit competition to a couple of firms. Barriers may block entry albeit the firm or firms currently within the market are earning profits. Thus, in markets with significant barriers to entry, it's not necessarily true that abnormally high profits will attract new firms, whichthis entry of latest firms will eventually cause the worth to say no in order that surviving firms earn only a traditionallevel of profit within the end of the day .
There are two sorts of monopoly, supported the kinds of barriers to entry they exploit. One is natural monopoly, where the barriers to entry are something aside from legal prohibition. The other is legal monopoly, where laws prohibit (or severely limit) competition.
Legal Monopoly
Franchising and Government Licensing
For some products, the govt erects barriers to entry by prohibiting or limiting competition. Under U.S. law, no organization but the U.S. Postal Service is legally allowed to deliver first-class mail. Many states or cities have laws or regulations that allow households a choice of just one power company , one waterworks , and one company to select up the rubbish . Most legal monopolies are utilities—products necessary for everyday life—that are socially beneficial. As a consequence, the govt allows producers to become regulated monopolies, to insure that customers have access to an appropriate amount of those products or services. Additionally, legal monopolies are often subject to economies of scale, so it is sensible to permit just one provider.
The government can also require a license to interact in certain trades. This can range from being a teamster , cutting hair, being an engineer, flying a plane, selling financial instrument, to even giving a tour. We see an increase in price and a decrease in quantity. The same logic holds here. When the availability of labor is restricted, it causes the worth of labor, or the wage, to extend . As we'll see, this creates an “insider-outsider” situation where people who have a license want to make sure that a license is usually needed to stay new competition out of the market and to keep wages higher.

c) Monopolist supply the both the customers

Types of Price Discrimination
There are three sorts of price discrimination: first-degree or perfect price discrimination, second-degree, and third-degree. These degrees of price discrimination also are referred to as personalized pricing (1st-degree pricing), product versioning or menu pricing (2nd-degree pricing), and group pricing (3rd-degree pricing).
First-degree Price Discrimination
First-degree discrimination, or perfect price discrimination, occurs when a business charges the utmost possible price for every unit consumed. Because prices vary among units, the firm captures all available consumer surplus for itself, or the economic surplus. Many industries involving client services practice first-degree price discrimination, where a corporation charges a special price for each good or service sold.
Second-degree Price Discrimination
Second-degree price discrimination occurs when a corporation charges a special price for various quantities consumed, like quantity discounts on bulk purchases.
Third-degree Price Discrimination
Third-degree price discrimination occurs when a corporation charges a special price to different consumer groups. For example, a theater may divide moviegoers into seniors, adults, and youngsters , each paying a special price when seeing an equivalent movie. This discrimination is the most common.
Examples of Price Discrimination
Many industries, like the airline industry, the humanities and show business , and therefore the pharmaceutical industry, use price discrimination strategies. Examples of price discrimination include issuing coupons, applying specific discounts (e.g., age discounts), and creating loyalty programs. One example of price discrimination are often seen within the airline industry. Consumers buying airline tickets several months beforehand typically pay but consumers purchasing at the eleventh hour . When demand for a specific flight is high, airlines raise ticket prices in response.
By contrast, when tickets for a flight aren't selling well, the airline reduces the value of obtainable tickets to undertake to get sales. Because many passengers prefer flying home late on Sunday, those flights tend to be costlier than flights leaving early Sunday morning. Airline passengers typically pay more for extra legroom too.
Menu pricing under imperfect competition. Competitive quality-based menu pricing .Sketch of the model . 2 firms located at the extremes of Hotelling line .Each firm can sell high-end & low-end versions of some good .Mass 1 of consumers uniformly distributed on the road . Heterogeneous in terms of transportation costs .Heterogeneous in terms of valuation of quality. Multiple equilibria in pricing game → Coexistence of. ‘Discriminatory’ equilibrium: both firms offer 2 versions, consumers self-select (high types buy high-end version, low types buy low-end version). ‘Non-discriminatory’ equilibrium: both firms produce only the high-end version.