Question

3. You live in a town with 300 adults and 200 children, and you are considering, producing a play. The production would have a fixed cost of $2,000 but no marginal costs beyond that Below are the demand schedules for adults and children.

(a) What is the profit maximizing price to charge for adults? For children? How many tickets will you sell? What is your profit? 

(b) Suppose the city passed a law banning any form of price discrimination. What is the optimal price now? How many tickets do you sell? What is your profit? 

(c) Does the law in (b) increase or decrease total surplus? 

4. A monopolistic competitive market is 

A. efficient when all firms are making zero economic profit. 

B. efficient when all firms make accounting normal profit. 

C. inefficient because firms always make zero economic profit. 

D. inefficient because even in the long run, price exceeds marginal cost.

Answer 1

P	Q adult	Q children	TRadult	MR adult	TR children	MR children
10	0	0	0	-	0	-
9	100	0	900	9	0	-
8	200	0	1600	7	0	-
7	300	0	2100	5	0	-
6	300	0	1800	-3	0	-
5	300	100	1500	-3	500	5
4	300	200	1200	-3	800	3
3	300	300	900	-3	900	-2
2	300	400	600	-3	800	-2
1	300	500	300	-3	500	-2
0	300	600	0	-3	0	-2

A. Price to charge adults= $7

TR = $2100, Q= 300

Price to charge children= $4

TR= $800,Q= 200

Total profit will be maximum $2900-$2000=$900 with total 500 tickets sold.

B. Without price discrimination I will charge $7 and will sell 300 tickets to adults maximizing profit $2100-$2000=$100.

C. Total surplus decreases as 200 children who were able to buy tickets are not able to buy now. Also the producer profit decreases.

So, total surplus decreases.

4. d. Inefficient because even in the long run price exceeds marginal cost

Reason- In the long run Monopolistic competitive firms still produce where MC=MR but demand curve shifts as new firms enter the market. Economic profit starts reducing and price is always higher than marginal cost.