Please explain each step and answer it separately for each question. QUESTION 1
ID: 1203422 • Letter: P
Question
Please explain each step and answer it separately for each question. QUESTION 1 Sal's satellite company broadcasts TV to subscribers in Los Angeles and New York. The demand functions for each of these two groups are PNY # 150-3"QNY or QNY = 50-1/3 . PNY PLA 120-3/2 QLA Or QLA -80-2/3 PA where Q is in thousands of subscriptions per year and P is the subsciption price per year The cost of providing Q units of service is given by where O is in thousands of subscriptions per year and P is the subscription price per year. The cost of provnding Q unts of senvice is oven by C = 1000 + 30-Q and MC 30 where Q = QNY + QLA Note that MRNY # 150-6"QNY MRLA 120-3'QLA and quantties for New York and Los Angeles markets? 1. What are the profit maximizing prices and quantities for New York and Los Angeles markets? 2. Draw the graphs of both the NY and LA markets and determine the optimum prices and quantities 3. What are the elasticities of demand for the NY and LA markets? 4. For third degree price discrimination, what is the relationship between pricing and elasticity of demand in the two markets? 5. Under what conditions can a firm do third degree price discrimination?Explanation / Answer
1. For profit to be maximized , the compant should produce till MR = MC
S0 for New York equating MR =MC
MC for NEW York = 30
and MR = 150 - 6Q
So, 150 - 6Q = 30
Q*ny = 20
P*ny = 150 - 3Q = 150 - 3*20 = 90
For Los Angeles , For profit to be maximized
equating MR =MC
MC = 30
and MR = 120 - 3Q
So, 120 - 3Q = 30
Q*La= 30
P*La = 150 - 3Q = 120 - 3/2*30 = 75
2. For graph just put Price and Quantity equal to 0 and get the points on X and Y axis and just join them. the equilibrium quantity is where MC interesects MR.
3. Ed = % change in Q demanded/% change in Price = Slope of demand curve
So, ED of NY = -1/3 = -0.33
ED for LA = -2/3 = -0.66
4. In case of third degree Price discrimination , the company will charge lower price where Elasticity of Demand is High or Demand is Elastic and will charge higher price where Elasticity of Demand is low or Demand is less elastic relative to other.
5. The Conditions are
1) It should have market control and be a price maker
(2) The firm should identify two or more groups that are willing to pay different prices,
(3) The firm shoud be able to keep the buyers in one group from reselling the good to another group. In this way, a seller is able to charge each group what they, and they alone, are willing to pay.
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