# Managerial Economics 8-3 Homework: Chapter 11

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1.  You are the manager of a monopoly that sells a product to two groups of consumers in different parts of the country. Group 1’s elasticity of demand is -6, while group 2’s is -3. Your marginal cost of producing the product is \$70.

a. Determine your optimal markups and prices under third-degree price discrimination.

2.  A monopoly is considering selling several units of a homogeneous product as a single package. A typical consumer’s demand for the product is Qd = 120 - 0.5P, and the marginal cost of production is \$150.

a. Determine the optimal number of units to put in a package.

b. How much should the firm charge for this package?

3.  You are the owner of a local Honda dealership. Unlike other dealerships in the area, you take pride in your “No Haggle” sales policy. Last year, your dealership earned record profits of \$1.5 million. In your market, you compete against two other dealers, and the market-level price elasticity of demand for midsized Honda automobiles is -1.3. In each of the last five years, your dealership has sold more midsized automobiles than any other Honda dealership in the nation. This entitled your dealership to an additional 30 percent off the manufacturer’s suggested retail price (MSRP) in each year. Taking this into account, your marginal cost of a midsized automobile is \$12,000.

What price should you charge for a midsized automobile if you expect to maintain your record sales?

4.  Suppose the European Union (EU) is investigating a proposed merger between two of the largest distillers of premium Scotch liquor. Based on some economists’ definition of the relevant market, the two firms proposing to merge enjoyed a combined market share of about two-thirds, while another firm essentially controlled the remaining share of the market. Additionally, suppose that the (wholesale) market elasticity of demand for Scotch liquor is -1.9 and that it costs \$14.80 to produce and distribute each liter of Scotch.

Based only on these data, provide quantitative estimates of the likely pre- and postmerger prices in the wholesale market for premium Scotch liquor.

Instruction: Do not round intermediate calculations. Round your final answers to the nearest penny (two decimal places).

5.  As a manager of a chain of movie theaters that are monopolies in their respective markets, you have noticed much higher demand on weekends than during the week. You therefore conducted a study that has revealed two different demand curves at your movie theaters. On weekends, the inverse demand function is P = 20 – 0.001Q; on weekdays, it is P = 15 – 0.002Q. You acquire legal rights from movie producers to show their films at a cost of \$25,000 per movie, plus a \$2.50 “royalty” for each moviegoer entering your theaters (the average moviegoer in your market watches a movie only once).

What price should you charge on weekends?