EX-5

A monthly magazine sells 1,000 copies each month at a price of $40 a copy. The magazine's costs are $16 per unit plus a fixed cost of $10,000 a month. The firm believes that the elasticity of demand is constant at 5.

Does the firm maximize profit in this case? If not, what price should the firm charge if it wishes to maximize profit? By how much would its profit increase in this case?

The firm finds out that students refrain from buying the magazine because the price is too high. The firm estimates that students' elasticity of demand is constant at 9. What discount (in percentage terms) should the firm offer to students, relative to the optimal price you found in part a above?

Elizabeth Airlines is the only company that flies one route: Chicago-Honolulu. The demand for each flight on this route is: Q = 500 – P. Elizabeth's costs of running each flight is $30,000 plus $100 per passenger.

What is the profit maximizing price EA will charge and how many people will be on each flight? What is EA's profit for each flight?

Elizabeth learns that the fixed costs per flight are $41,000 instead of $30,000. Will she stay in Business long?

Elizabeth finds out that two different types of people fly to Honolulu. Type A is business people with a demand of Q_A = 260 – 0.4P. Type B is students with a demand Q_B = 240 – 0.6P. The students are easy to spot, so Elizabeth decides to charge them different prices. What price does Elizabeth charge the students? What price does Elizabeth charge the other customers? How many of each type are on each flight? What would EA's profit be for each flight? Would she stay in business? Calculate the consumer surplus of each consumer group. What is the total consumer surplus?

Before EA started price discrimination (a), how much consumer surplus was the Type A demand getting from air travel to Honolulu? Type B? Why did the total consumer surplus decline with price discrimination, even though the total quantity sold was unchanged?

In a monopolistic market there are two consumers, i = 1, 2, each with a different demand function: $q_1 = 40 - 2P$, $q_2 = 20 - P$. The firm's cost function is $TC = 6Q$ where $Q = q_1 + q_2$.

Assume that the monopoly can charge different TPT contracts for each consumer. What are the TPT fees in this case?

Assume now that the monopoly cannot charge different TPT contracts for each consumer. What are the TPT fees in this case?

How would your answer to b change if there exist 100 consumers for each type?

What is the maximum payment that the firm will be willing to pay in order to remove the restriction in b and determine a different TPT contract for each consumer?

Assume that the monopolist cannot identify each consumer's type but can offer a menu of different two-part tariff (TPT) contracts (second-degree price discrimination). What are the optimal TPT contracts in this case?