Managerial Economics Assignment: Price Discrimination & Market Failure

This assignment solution for Managerial Economics covers a range of topics including government intervention to correct market failures using tools like price ceilings, Pigovian taxes, license fees, and public goods. It analyzes market equilibrium for potatoes, calculating consumer and producer surplus, and exploring factors affecting demand and supply. The solution further delves into price discrimination strategies, explaining how producers can appropriate consumer surplus. It also discusses the impact of price ceilings on oil shortages and provides a detailed analysis of a bookstore's profit maximization, including cost, revenue, and profit calculations, and the determination of equilibrium price and quantity. The assignment incorporates figures and references to support the analysis.

Running head: Managerial Economics
Managerial Economics
Name of the Student
Name of the University
Student ID

1Managerial Economics
Table of Contents
Answer 1....................................................................................................................................2
Answer 2....................................................................................................................................3
Answer 3....................................................................................................................................5
Answer 4....................................................................................................................................7
Answer 5....................................................................................................................................8
Answer 6....................................................................................................................................8
References................................................................................................................................10

2Managerial Economics
Answer 1
The government uses many tools to correct the inefficiencies causes due to market
failure. Among all such tools here discussing about four tools that government uses often to
correct market failure problems
1. Price ceiling: In monopoly market structure, a firm charge high price and appropriate
the consumer surplus by earning supernormal profit and also causes loss of social
welfare as deadweight loss. Thus, to correct this inefficiency government charges
price ceiling either equivalent to free market price or just a little above it such that
monopoly firm cannot charge more price and consumer surplus remains to the
consumer.
2. Pigovian tax: It is also known as corrective tax. This kind of tax is used to reduce
negative externality caused by production of goods that emits effluents that causes
harm to the environment or to the society. Imposition of this tax is done to increase
the cost of production such that producer produces less or nil amount of good and
thereby negative externality reduces (Jacobs and De Mooji 2015).
3. Licence fee: In case of common property it has been observed that those kind of
properties are overused as they do not pose any cost to the beneficiary or the user,
such as in case of fishing where fisher men does over fishing. Thus, to control such
activities government charges large sum of money as licence fee to conduct the
activity that restricts the number of user or beneficiary and thereby over utilization of
the common property is controlled (Gunnlaugsson, Kristofersson and Agnarsson
2018).
4. Public goods: There are several goods that are not produced by private sector because
those goods does not have the properties like excludability and rivalry, which is
required by private sector to produce goods otherwise their profit making objective

3Managerial Economics
would be hampered. Example of such a good is lighthouse or road. Thus, the
government produces those goods. These goods are commonly known as public
goods.
In the case of steel plant in the US, that generates sludge. One unit production of steel
generates one unit of sludge. Thus, to control the production sludge, the amount of
steel produced must be reduced. Therefore, the government would impose Pigovian
tax to control the production of steel and thereby reduce the sludge production (Brim
2017).
Answer 2
(a)
Market demand for potatoes is given by Q=1000-250P and market supply for potatoes
is given by Q=150P. The market equilibrium takes place where market demand equals market
supply and it gives the equilibrium price.
Therefore, equilibrium price is give as
1000−250 P=150 P
¿ , 400 P=1000
¿ , P=2.5
Hence, price per bag of potatoes is 2.5.
Therefore, equilibrium quantity is given as
Q=150 P
¿ , Q=150 ×2.5
¿ , Q=375

4Managerial Economics
Hence, the equilibrium quantity is 375 bags of potatoes.
Figure 1: Equilibrium price
and quantity of potatoes
Source: (Created by the Author)
(b) Consumer surplus at the equilibrium is the benefit that a consumer gains by consuming a
bag of potato. The consumer surplus in the potato market is given as green coloured triangle
in figure 1.
(c) Producer surplus at the equilibrium is the benefit that a producer gains by proceeding and
selling a bag of potato. The producer surplus in the potato market is given as yellow coloured
triangle in figure 1(Zhang et al. 2016).
(d) The demand for potatoes might increase due to fall in price of the potatoes, a scientific
research suggests that consuming potato is good for brain development and price of substitute
vegetables of potato has increased causing more demand for potatoes.

5Managerial Economics
(e) The supply of potatoes might decrease due to unavailability of sufficient amount of
labour; a recent flood has reduced the available land for potato cultivation and tax imposed
by government on production of potato.
Answer 3
(a)
Figure 2: Demand and supply equilibrium
Source: (Created by the Author)
(b)
(i) At price 1, the demand for potatoes will be high and to meet the demand and earn more
profit producers will produce more potatoes to increase supply
(ii) At price 4, demand for potatoes will fall and excess supply will occur which will cause
the price to fall.
0 20 40 60 80 100 120 140 160
0
1
2
3
4
5
6
Qd Qs
Quantity
Price

6Managerial Economics
(c) (i)
Figure 3: Price of cocoa falls
Source; (Created by the Author)
Fall in cocoa price of cocoa increase the supply and changes the equilibrium supply to
Q1from Q* and because of rise in supply equilibrium price falls to P1 from previous
equilibrium P* (Varian 2014).
(ii)

7Managerial Economics
Figure 4: Fall in demand due to health consciousness
Source: (Created by the Author)
Demand falls due to decline in consumption owing to health consciousness.
Therefore, equilibrium price and quantity falls to P2 from P* and to Q2 from Q* respectively.
(iii)
Figure 5: Fall in price
Source: (Created by the Author)
Demand falls due to fall in consumption as consumers became more health conscious,
whereas supply increases due to fall in price of cocoa. Thus, the equilibrium quantity remains
the same at Q*, but equilibrium price falls to P3 due to fall in demand and increase in supply
(Pindyck and Rubinfeld 2018).
Answer 4
The strategy of firms to charge different customers with different prices for same
product with an objective of maximizing revenue and profit is known as price discrimination.
Price discrimination is of three type namely first degree, second degree and third degree price
discrimination. The question is how a producer can appropriate more consumer surplus by
charging lower price to many consumers. The concept of reservation price steps in here,

8Managerial Economics
which answers the question. The reservation price can be defined as the highest price a
consumer or customer is keen to pay for a good. Thus, by discriminating among consumers,
producer charges the maximum price a consumer is willing to give. Hence, the producer can
sell the maximum number of goods and cater to every consumer who is willing to buy the
good. Therefore, by using this strategy of price discrimination, the producer is able to
appropriate every consumers’ surplus and thus by charging low price to some people,
producer appropriates consumer surplus. Hence, this appropriation of consumer surplus by
the producer reduces the total consumer surplus. Therefore, price discrimination reduces
consumer surplus (Cazier, Shao and Louis 2017).
Answer 5
The crude oil price in the world market has increased. Owing to the increase in price
of crude oil, most people are blaming OPEC for oil shortages. However, economists blame
government for limiting the price. Imposition of price ceiling on oil has restricted the oil
companies from charging high price, thus at the low price set by government the companies
are supplying low as a result, there occurred a shortage of supply. Hence, demand is higher
than supply and thus to buy gas people has to stand in long lines (Blankart 2017).
Answer 6
(a)
Quantity
of
Books(pe
r hour)
Total
Cost
Average
Cost
Marginal
Cost
Price
(dollars
per
book)
TR MR
9 247 27.44 9 57 513 47
10 256 25.60 9 56 560 47
11 267 24.27 11 55 605 45
12 280 23.33 13 54 648 43
13 295 22.69 15 53 689 41
14 312 22.29 17 52 728 39

9Managerial Economics
15 331 22.07 19 51 765 37
16 352 22.00 21 50 800 35
17 375 22.06 23 49 833 33
18 400 22.22 25 48 864 31
19 427 22.47 27 47 893 29
20 456 22.80 29 46 920 27
21 487 23.19 31 45 945 25
(b) The points on the demand curved faced by Laura’s bookstore are 57, 56, 55, 54, 53, 52,
53, 51, 50, 49, 48, 47, 46 and 45.
(c) The profit maximizing output of Laura is 19. She will sell the books at price $47 per book
and her total economic profit is $466.
(d)
Figure 6: Laura’s equilibrium
Source: (Created by the Author)
The equilibrium price and quantity of Laura is $47 and 19 respectively as shown in
the above figure and the yellow triangle in the figure shows Laura’s economic profit.

10Managerial Economics
References
Blankart, C.B., 2017. Peak oil theory. In Economic Ideas You Should Forget (pp. 27-28).
Springer, Cham.
Brim, O., 2017. The economic theory of representative government. Routledge.
Cazier, J., Shao, B. and Louis, R.S., 2017. Value congruence, trust, and their effects on
purchase intention and reservation price. ACM Transactions on Management Information
Systems (TMIS), 8(4), p.13.
Gunnlaugsson, S.B., Kristofersson, D. and Agnarsson, S., 2018. Fishing for a fee: Resource
rent taxation in Iceland's fisheries. Ocean & coastal management, 163, pp.141-150.
Jacobs, B. and De Mooij, R.A., 2015. Pigou meets Mirrlees: On the irrelevance of tax
distortions for the second-best Pigouvian tax. Journal of Environmental Economics and
Management, 71, pp.90-108.
Pindyck, R.S. and Rubinfeld, D.L., 2018. Microeconomics (Global ed., The Pearson series in
economics). Harlow: Pearson.
Varian, H.R., 2014. Intermediate microeconomics with calculus: a modern approach. WW
Norton & Company.
Zhang, Y., Zhao, Q., Zhang, Y., Friedman, D., Zhang, M., Liu, Y. and Ma, S., 2016, April.
Economic recommendation with surplus maximization. In Proceedings of the 25th
International Conference on World Wide Web (pp. 73-83). International World Wide Web
Conferences Steering Committee.

11Managerial Economics