Question 1

The following shows the demands and marginal revenue in two markets, 1 and 2, for a price discriminating firm along with total marginal revenue, MRT, and marginal cost MC:

Compare the demand conditions in each market; i.e. how do the two markets differ in their demand for the firm's product?

a. Both markets have equivalent demand since MC is constant in both markets.
b. Market 1 has more demand than market 2. 1 is high demanders, 2 is low demanders.
c. Market 1 has less demand than market 2. 1 is low demanders, 2 is high demanders.

Question 2

How much total output should the firm produce (for both markets combined)? (It would be easiest to copy and paste the picture above and draw directly on the picture using Insert, Shapes to do the next few questions.)

a. 250 units
b. 225 units
c. 425 units
d. 75 units

Question 3

How should that output be allocated between markets 1 and 2?

a. 150 units in market 1; ≈310 units in market 2
b. 125 units in market 1; ≈180 units in market 2
c. 75 units in market 1; 150 units in market 2
d. 225 units in market 1; 250 units in market 2

Question 4

What price should the firm charge in each market?

a. ≈$27.50 in both markets
b. ≈$22.50 in market 1; ≈$32 in market 2
c. ≈$27.50 in market 1; $35 in market 2
d. $20 in both markets

Question 5

On Amazon.com, there are three versions of Keynes' famous General Theory: a hardcover for $19.79, paperback for $8.82, and a Kindle version for $2.99. There is not much difference in the cost of production between hardcover and paperback books (though there likely is for the Kindle e-book version), but hardcover books do tend to be published earlier than paperback versions of the same book. How do you explain the wide variety of prices for basically the same book?

a. Price discrimination between demanders. High demanders are willing to pay a high price for a hardcover that is published early. Low demanders aren't, and are only willing to pay low price for later paperback. It is much cheaper to produce the Kindle version (MC probably close to zero), and not many buyers (people with Kindles, less D) lead to lowest price.
b. The market for hardcover books has more demand and less supply than the market for paperbacks, which likewise has more demand and less supply than the market for e-books. The equilibrium prices all reflect these differences.
c. Price discrimination between demanders. Kindle owners are high demanders since the format is not compatible with anything but Kindles. Hardcover buyers are low demanders since there aren't many who would want a hardcover when paperbacks or e-books are cheaper. There are more paperback buyers, so they pay a price between these two extremes.
d. Even though the cost of production between hardcover and paperback is small, demand is highly elastic, so this small cost difference results in a large price difference. The cost difference between paperback and e-books is larger, resulting in the smaller gap between paperback and e-book prices.
Information

Information text

Do Applied Problem #5 on page 700 about Zatab (except don't do part d):

Mirk Labs is a British pharmaceutical company that currently enjoys a patent monopoly in Europe, Canada, and the United States on Zatab (pronounced zay-tab), an allergy medication. The global demand for Zatab is
Qd = 15.0 - 0.2P
where Qd is annual quantity demanded (in millions of units) of Zatab, and P is the wholesale price of Zatab per unit. A decade ago, Mirk Labs incurred $60 million in research and development costs for Zatab. Current production costs for Zatab are constant and equal to $5 per unit.

Question 6

What wholesale price will Mirk Labs set? How much Zatab will it produce and sell annually? How much annual profit does the firm make on Zatab?

a. P = $50; Q = 5 million; profit = $225 million
b. P = $37.5; Q = 7.5 million; profit = $243.75 million
c. P = $5; Q = 14 million; profit = $0 million (break even)
d. P = $40; Q = 7 million; profit = $245 million

Question 7

The patent on Zatab expires next month, and dozens of pharmaceutical firms are prepared to enter the market with identical generic versions of Zatab. What price and quantity will result once the patent expires and competition emerges in this market? How much consumer surplus annually will allergy sufferers who take Zatab gain? (Recall that area of a triangle = ½ * base * height)

a. P = $5; Q = 7 million; CS increases by $245 million ($122.50m to $367.5m)
b. P = $37.5; Q = 7.5 million; CS increases by $18.125 million ($122.50m to $140.625m)
c. P = $5; Q = 14 million; CS increases by $367.50 million ($122.50m to $490m)
d. P = $20; Q = 11 million; CS increases by $180 million ($122.50m to $302.5m)

Question 8

Calculate the annual deadweight loss (DWL) to society due to the drug firm's market power in Zatab. What exactly does this deadweight loss represent?

a. DWL = $122.5 million; DWL represents the loss in consumer welfare that results from Mirk Labs' market power.
b. DWL = $367.5 million; DWL represents the increase in revenue that Mirk Labs enjoys by selling a patented product with inelastic demand.
c. DWL = $490 million; DWL represents the increase in profit that Mirk Labs is able to obtain as a result of its market power.
d. DWL = $245 million; DWL represents the total drop in happiness that consumers lose (consumer surplus) that becomes transferred as profit to Mirk Labs.

Question 9

After considering the situation of market power for Zatab and how it changed after the introduction of generics, consider situations of natural disasters and how governments respond to shortages resulting from them.

Read this article; what is the most likely way that anti-gouging laws potentially can increase social welfare?

a. Penalties assessed on price gougers can be redistributed to victims or the area at large that was affected by the natural disaster. In that sense, the government wants more illegal price gouging to occur so it can prosecute and raise more revenue in fines and redistribute to voters.

b. They eliminate the deadweight loss associated with monopoly power (and prices) of price gougers. With lower prices, they increase consumer surplus.

c. They increase the deadweight loss for those companies who practice price gouging. The laws raise these companies' costs so that it is no longer profitable for the companies to set price according to MR = MC.

d. Legislators and regulators benefit by making pronouncements against price gougers, knowing the public holds such a low opinion of them (the gougers, not the politicians :) . The public sees swift action against profiteers, and legislators/regulators enhance their standing in the public eye.

Question 10

In contrast, read this blog post; according to the post, why might anti-gouging laws not increase social welfare, or at least why might they lead to consequences which are unintended by the government?

a. The laws may increase consumer surplus, but they also reduce producer surplus, so society is no better nor worse off having the laws than it is not having them.

b. They create shortages (excess demand), which necessitate waiting in long lines for "cheap" products. Also, goods are distributed in ways that may not reflect the need of the buyer.

c. The long lines associated with them is evidence of a surplus or excess supply, so society devotes too many scarce resources to gasoline production than it otherwise would in absence of the law.

d. They try to prevent high prices, but do nothing to address the greed of the price gougers, which is the root of the problem.