PROBLEM SET 6

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 1^st degree discrimination is very difficult to practice. Provide 1 example where a form of 1^st 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:

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

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

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

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