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?

ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
icon
Related questions
Question

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?

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.
Transcribed Image Text: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.
Expert Solution
steps

Step by step

Solved in 3 steps with 1 images

Blurred answer
Knowledge Booster
Consumer Surplus
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.
Similar questions
  • SEE MORE QUESTIONS
Recommended textbooks for you
ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
Economics
ISBN:
9780190931919
Author:
NEWNAN
Publisher:
Oxford University Press
Principles of Economics (12th Edition)
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (MindTap Course List)
Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Managerial Economics: A Problem Solving Approach
Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-…
Managerial Economics & Business Strategy (Mcgraw-…
Economics
ISBN:
9781259290619
Author:
Michael Baye, Jeff Prince
Publisher:
McGraw-Hill Education