BSA 2019 - Price Discrimination

   

Added on  2020-03-07

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Q1 a. Price discrimination implies that the seller charges different price from different buyersfor the same product based on their willingness to pay. This is possible only in monopoly. As shown in table the monopolist can charge $16 for 6 tickets from adult buyers, while only $2 will be paid for 6 tickets by concession buyers. So price is different for same quantity for different buyers.b.Producer surplus will be higher and consumer surplus is lower when there is price discrimination as compared to absence of discrimination.c.The seller will compute MR for each market and equate with MC= 4PQTRMR1211210220883244642404520-2So for adult buyers he will sell a total quantity of 10 for $12. For the other market he will sell 3 tickets for $8. d.Consumer surplus = what consumer is willing to pay and what he actually pays. in adult buyer market the surplus = (20-12)*2 +(18-12)*2+(16-12)*2 +(14-12)*2 = 40From other section surplus = (12-8) + (10-8) = 6. So total = 46. e.With no discrimination we drawtotal demand at every price. Nowuse MC= MR rule so that he sellsPQTRMR202401847216166961214811281210120410121200814112-461696-841872-1222040-16PQtotal QTRMR2022401844721616669612148811281210+11113220/3=6.331012+2141408/3=2.33814+317136-2616+420120-8418+52392-14220+62652-20
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a total of 11 tickets only for $12. Consumer surplus is now (20-12)*2 +(18-12)*2+(16-12)*2 +(14-12)*3 = 42
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Q2a.The tax must be raised on a good that has inelastic demand. This means value must beless than 1. Cigarettes fit the bill here – they must be taxed. When demand is inelastic any rise in price is not met with large decline in demand- this allows revenues to rise due to higher price. b.Unitary elasticity needs a value of 1- Alcohol has unitary elasticity.c.Price elasticity of demand = % change in demand/ % change in priceElasticity= -0.5% change in demand = -20So required % change in price = -20/-0.5 =40 or 40% rise in price. Thus we need a 40% tax. d.Elasticity= - 1% change in demand = -20So required % change in price = -20/-1 = 20 or 20% rise in price. Thus we need a 20% tax. e.Elasticity= -1.5% change in demand = -30So required % change in price = -30/-1.5 = 20 or 20% rise in price. Thus we need a 20% tax.
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