1. You compete with many firms offering similar products (monopolistic competition). An economic consulting firm has estimated the own-price elasticity for your most profitable product is -1.50. Your marginal cost is constant at $75 across most of your production volume capability. What price will maximize profits?  Show the computation.

     

  2. Define the 3 types of price discrimination and explain why 1st degree discrimination is very difficult to practice. Provide 1 example where a form of 1st degree discrimination is practiced.

     

  3. Complete and label the diagram showing the numbers of seats sold and price for leisure and business passengers. Answer the following questions:

    1. If the price of fuel increases modestly, will fares increase?

    2. Are all seats sold?  If not, wouldn’t the airline make more money by selling more seats at a lower price?

 

 

  1. Explain the conditions necessary for a firm to practice 3rd degree price discrimination and using airline conditions as examples.

     

  2. Wall-Mart offers to match the price of any competitor. Why is this guarantee not necessarily a benefit to consumers?

 

 

 

    • 6 years ago
    MBAA 523 Problem Set 6 Solution
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