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Chapter 11: Q2. (page 449)

If the demand for drive-in movies is more elastic for couples than for single individuals, it will be optimal for theaters to charge one admission fee for the driver of the car and an extra fee for passengers. True or false? Explain.

Short Answer

Expert verified

The statement is true.

Step by step solution

01

Step 1. Explanation

When both the entry fee and usage fee are charged, it is known as a two-part tariff. There is an entry fee for the car, including the driver, and the usage fee for the other passengers. The marginal cost of the movie theatres is zero, i.e., there is only a fixed cost which does not change with the number of cars entering the theaters. Thus, the theaters should charge the entry fee, equal to the driver's consumer surplus, and a usage fee from every added passenger.

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Most popular questions from this chapter

As the owner of the only tennis club in an isolated wealthy community, you must decide on membership dues and fees for court time. There are two types of tennis players. 鈥淪erious鈥� players have demand

Q1 - 10 - P

where Q1 is court hours per week and P is the fee per hour for each individual player. There are also 鈥渙ccasional鈥� players with demand

Q2 = 4 - 0.25P

Assume that there are 1000 players of each type. Because you have plenty of courts, the marginal cost of court time is zero. You have fixed costs of $10,000 per week. Serious and occasional players look alike, so you must charge them the same prices.

  1. Suppose that to maintain a 鈥減rofessional鈥� atmosphere, you want to limit membership to serious players. How should you set the annual membership dues and court fees (assume 52 weeks per year) to maximize profits, keeping in mind the constraint that only serious players choose to join? What would profits be (per week)?
  2. A friend tells you that you could make greater profits by encouraging both types of players to join. Is your friend right? What annual dues and court fees would maximize weekly profits? What would these profits be?
  3. Suppose that over the years, young, upwardly mobile professionals move to your community, all of whom are serious players. You believe there are now 3000 serious players and 1000 occasional players. Would it still be profitable to cater to the occasional player? What would be the profit-maximizing annual dues and court fees? What would profits be per week?

You are selling two goods, 1 and 2, to a market consisting of three consumers with reservation prices as follows:

RESERVATION PRICE (\()

CONSUMER FOR 1 FOR 2

A 20 100

B 60 60

C 100 20

The unit cost of each product is \)30.

a. Compute the optimal prices and profits for (i) selling the goods separately, (ii) pure bundling, and (iii) mixed bundling.

b. Which strategy would be most profitable? Why?

A monopolist is deciding how to allocate output between two geographically separated markets (East Coast and Midwest). Demand and marginal revenue for the two markets are

P1 = 15 鈥� Q1 MR1 = 15 - 2Q1

P2 = 25 - 2Q2 MR2 = 25 - 4Q2

The monopolist鈥檚 total cost is C = 5 + 3(Q1 + Q2). What are price, output, profits, marginal revenues, and deadweight loss (i) if the monopolist can price discriminate? (ii) if the law prohibits charging different prices in the two regions?

You are an executive for Super Computer, Inc. (SC), which rents out supercomputers. SC receives a fixed rental payment per time period in exchange for the right to unlimited computing at a rate of P cents per second. SC has two types of potential customers of equal number鈥�10 businesses and 10 academic institutions. Each business customer has the demand function Q = 10 - P, where Q is in millions of seconds per month; each academic institution has the demand Q = 8 - P. The marginal cost to SC of additional computing is 2 cents per second, regardless of volume.

  1. Suppose that you could separate business and academic customers. What rental fee and usage fee would you charge each group? What would be your profits?
  2. Suppose you were unable to keep the two types of customers separate and charged a zero rental fee. What usage fee would maximize your profits? What would be your profits?
  3. Suppose you set up one two-part tariff鈥攖hat is, you set one rental and one usage fee that both business and academic customers pay. What usage and rental fees would you set? What would be your profits? Explain why the price would not be equal to marginal cost.

Suppose that BMW can produce any quantity of cars at a constant marginal cost equal to \(20,000 and a fixed cost of \)10 billion. You are asked to advise the CEO as to what prices and quantities BMW should set for sales in Europe and in the United States. The demand for BMWs in each market is given by

QE = 4,000,000 - 100PE

and

QU = 1,000,000 - 20PU

where the subscript E denotes Europe, the subscript U denotes the United States. Assume that BMW can restrict U.S. sales to authorized BMW dealers only.

  1. What quantity of BMWs should the firm sell in each market, and what should the price be in each market? What should the total profit be?
  2. If BMW were forced to charge the same price in each market, what would be the quantity sold in each market, the equilibrium price, and the company鈥檚 profit?
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