# Economic

Question 1: Draw a diagram showing the D, MR, MC and ATC for a single-price monopolist. Assume the demand curve D is a straight line. Use this fact to explain (and show on the diagram) why a profit-maximising monopolist always chooses a level of output on the elastic part of the demand curve.

Question 2: Draw a diagram showing the D, MR, MC and ATC for a single-price monopolist. Assume the demand curve D is a straight line, and that the monopolist maximises profit. On your diagram, show the loss of consumer and producer surplus which occurs because the price is set at the monopolist’s profit-maximising level, rather than the price that would be charged if the market were perfectly competitive. Provide a clear explanation.

Question 3: ‘Group pricing’ and ‘uniform pricing’ are two pricing strategies open to a monopolist. (i) Briefly explain the circumstances in which group pricing may be a preferred strategy for a monopolist. (ii)Which of the following situations would provide an opportunity for group pricing? Explain why, or why not.

1. a) Offering discounts to customers who prefer online shopping. b) Providing different prices for customers who are seniors. c) Providing every tenth cup of coffee free for holders of a coffee loyalty card. d) Selling e-books at different prices to hardcover books.

Question 4. Consider the following payoff matrix for two airlines offering return tickets from London to New York. For example, if A offers a ticket at a price of \$250 (low) and B offers tickets at \$300 (high), the return to A is \$140m, while the return to B is just \$70m.

(i) If the airlines are not allowed to collude, what is the dominant strategy for each airline? Explain your reasoning.

(ii) Could the airlines do better by colluding? (iii) Suppose the airlines have the same costs. Suggest a simple rule which would facilitate collusion.

Airline B

 \$250 \$300 \$250 \$100 / \$100 \$140 / \$70 \$300 \$70 / \$140 \$120 / \$120

Airline A

p(4)

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