Reminder: Homework #5 due this Friday.

Homework 9, Chapter 9: Please be sure and do parts a-c. If you do parts d and e correctly we'll give you extra credit.

Helpful hints:

You are a monopolist in the market for a specific video game. Your demand curve is given by

P=80-Q/2

and your marginal cost curve is

MC=Q

your fixed costs equal $400

a) graph the demand and the marginal cost curve

hint: set P equal to zero and solve for Q.
This gives you the horizontal intercept.

Then set Q equal to zero and solve for P; this gives you the vertical intercept.

The marginal cost curve is easy to plot directly--the vertical value is equal to the horizontal value

b) derive and graph the marginal revenue curve

See text p. 230 for formula. Marginal revenue curve is twice as steep as demand curve

c) calculate and indicate on the graph the equilibrium price and quantity

Set marginal cost equal to marginal revenue and solve for Q (you can then plug this in and solve for the equilibrium P)

Key concept from Ch. 9 covered in class today:

Price discrimination

From the point of view of maximizing profits, perfect price discrimination would be ideal--if you could charge each buyer exactly what their reservation price is...

examples of implicit price discrimination are discounts for senior citizens or children, super-saver discounts on air travel that involves a Saturday night stay...

In practice, firms try to develop "hurdle" methods--a discount to buyers who overcome an obstacle, like a rebate that takes time and effort to mail in, or time spent waiting...

Coca-Cola as case study of a firm engaged in monopolistic competition:

Coca-Cola has enjoyed steady increases in the price of its stock.

If you had bought 100 shares in 1919 for an investment of $4000, it would be worth $600 million today.

However, if you had bought 100 shares in 2000 for an investment of $4,000 it would be worth about $2,500 today.

In the late 1990s, Coke earned about 17 cents of (accounting) profit on every dollar of sales.

It's interesting company, which is why I want to tell you more about it.

The main source for my presentation is Mark Pendergrast, For God, Country, and Coca-Cola . It's a great book!

I can't just post my Powerpoint presentation because it includes some copyrighted material, and posting on the web goes beyond "fair use." (Coca-Cola owns the rights to all its ads).

Key points:

Coke was originally a "patent medicine" that included cocaine -related derivatives as well as high levels of caffeine

The guy who invented it (Pemberton)--key to its success were marketing, bottling, and advertising arrangements that contributed to "brand loyalty.

For example, by fixing the soda fountain price at 5 cents a glass and making the syrup available to soda fountains for 3 cents a glass, the company gave soda fountains a huge incentive to sell Coke (a guaranteed profit that could not be competed away).

New bottling technologies--combined with the new railway transportation system in which Atlanta was a hub also contributed to sales of bottled product.

As the public became more aware of possible health risks from cocaine related derivatives pressure was put on the company and in 1903 they stopped adding them. Later they came under pressure to reduce the caffeine content of the drink (they cut it in half and agreed not to market to children under 12).

An amusing side note--they were also subject to suits regarding unhygienic bottles and found a biologist from Emory University willing to eat insects and frogs that had been "pickled" in Coca Cola to prove they were not a health risk.

Drinking Coca-Cola today probably won't improve your health. But it probably won't hurt it either.

Let's try a couple of multiple choice practice questions:

Suppose monopolist M charges a uniform price of $10 based on profit maximization and has constant marginal costs of $3. Beth is willing to pay $6 for the monopolist's output.

Therefore,

A. the monopolist should lower his price to $6 for all consumers

B. the monopolist should ignore Beth's want; he is already profit-maximizing

C. if resale of the output is impossible, the monopolist should lower his price to $6 just for Beth

D. if resale of the output is possible, he should lower his price to $6 just for Beth

E. the monopolist will not be better off if he lowers his price to $6 just for Beth.

The correct answer is C.

Which of the following is not an example of the hurdle method of price discrimination?

A. A rebate offer

B. Eliminating all sales specials and reducing all prices by 10%

C. After Christmas sales.

D) Blue light specials

E) End of year clearance sales.

Correct answer is B. There's no discrimination involved when all prices are reduced.