ECON 160 SPRING 2020 7. A monopoly firm, Alex Inc., can set price in the apple market with marginal cost of $5. The weekly market demand, consumer, and producer cost-benefit schedules are given in the table. Demand Schedule Quantity Market price $ 1 2 3 4 5 7 8. 8. 7.5 7 6.5 6 5.5 5 4.5 Marginal use value 8 7.5 7 6.5 5.5 4.5 Consumer (Biwei) Total use value 8 15.5 22.5 29 35 40.5 45.5 50 Consumer surplus Total revenue 8 15 21 26 30 33 35 36 Marginal 8 7 5 4 3 2 1 Producer revenue (Alex) Average cost Total cost 5 5 5 5 5 5 5 10 15 20 25 30 35 40 Producer surplus 3 Market welfare 3 Note: all the numbers except the quantity demanded are in terms of dollars. 1) Suppose Biwei is the only consumer in the apple market, why is his marginal use value equal to the apple price? Calculate his consumer surplus (net gain from consumption) and fill in the table. How many apples he would like to buy per week? 2) As the only producer in the apple market, at what price, how many apples would Alex sell per week in order to maximize his economic profit? Calculate his producer surplus. 3) Consider the society as a whole, calculate the total welfare (total use value minus total production cost) and fill in the table. From the society's point of view, what is the optimal amount of apple that shall be produced? What is the amount of deadweight loss arising from monopoly decision compared with the social optimum? 4) To extract consumer surplus, the monopoly firm can charge differential prices on different costumers along the demand schedule (e.g., coupon, student discount, VIP price) according to their marginal use value. (Or, it can provide discounts for additional quantities purchased.) By adopting these strategies, can Alex potentially remove the deadweight loss under monopoly? Explain. 5) Another strategy Alex can increase his economic profit is to set an all-or-nothing price lower than the monopoly price. The all-or-nothing pricing strategy requires a consumer to buy all the apples at a given price. If Alex sets the all-or-nothing price at $6.25, calculate the economic rent and consumer surplus under all-or-nothing pricing for different quantities. What is the optimal all-or- nothing quantity Alex should sell to maximize economic profit? 6) Is the all-or-nothing strategy more efficient than monopoly decision for the society? Explain.