Suppose you are the monopoly owner of a movie theatre. You can allow people to enter the theatre at zero marginal cost, and you can provide popcorn at a constant marginal cost of $0.50 per bag. You have two customers, Larry and Terry, who are identical twins. Larry never buys popcorn under any circumstances. If you charge the monopoly price of $1.00 per bag for popcorn, Terry will buy 2 bags of popcorn and earn $0.50 in consumer's surplus, and you will earn $1.00 in profit from popcorn sales. If you charge the competitive price of $0.50 per bag for popcorn, Terry will buy 4 bags of popcorn and earn $2.00 in consumer's surplus, and you will earn no profit from popcorn sales.
(i) Suppose that Larry is willing to pay up to $8.00 to see the movie and Terry is willing to pay up to $5.00 to see the movie. How much should you charge for admission to the theatre and how much should you charge for popcorn?
(ii) Suppose that Larry is willing to pay up to $4.00 to see the movie and Terry is willing to pay up to $5.00 to see the movie. How much should you charge for admission to the theatre and how much should you charge for popcorn?
(i) Charge $7.00 for admission and $0.50 per bag for popcorn. Larry will attend at these prices, because he receives more than $7.00 of value from the movie. Terry will attend at these prices, because he receives $5.00 of value from the movie and $2.00 of consumer's surplus from the popcorn. You will appropriate all of Terry's consumer's surplus from the admission price and earn $14.00 in profit. If you charged the monopoly price for popcorn, you could charge a maximum of only $5.50 to get Terry to attend (his $5.00 value from the movie plus his $0.50 of consumer's surplus from popcorn). In this case, your profit would be only $12.00 ($5.50 each from Larry and Terry's admissions plus $1.00 in profit from popcorn sales).
(ii) Charge $4.00 for admission and $1.00 per bag for popcorn. Both Larry and Terry will attend at these prices, and you will earn $9.00 in profit ($4.00 each from Larry and Terry's admissions plus $1.00 in profit from popcorn sales). If you charge the competitive price for popcorn, you cannot raise the admission price and appropriate Terry's consumer's surplus from popcorn without also losing Larry's attendance.
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A) shadow pricing. B) first-degree price discrimination. C) third-degree price discrimination. D) second-degree price discrimination.
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A) buying a product in one market at a low price and reselling in another market at a higher price. B) suing a producer for illegal business practices. C) trading in the foreign exchange market. D) resolving a dispute in front of an arbitrator instead of a court of law.
Assume you are lending money to a friend for a year and want to earn real interest of 5 percent on the loan. If you believe the inflation rate the next year will be 3 percent, you should charge your friend a nominal interest rate of
a. 5 percent b. 8 percent c. 3 percent d. 15 percent e. whatever he will pay
Assume that the expectation of a recession next year causes business investments and household consumption to fall, as well as the financing to support it. If the nation has low mobility international capital markets and a fixed exchange rate system, what happens to the quantity of real loanable funds per time period and the monetary base in the context of the Three-Sector-Model?
a. The quantity of real loanable funds rises and monetary base rises. b. The quantity of real loanable funds falls and monetary base rises. c. The quantity of real loanable funds falls and monetary base falls. d. The quantity of real loanable funds and monetary base remain the same. e. There is not enough information to determine what happens to these two macroeconomic variables.