MBAA 523 Problem Set 6

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.

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

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?

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

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