1.) BAA
is a private company that operates some of the largest airports in the United
Kingdom, including Heathrow and Gatwick. Suppose that BAA recently commissioned
your consulting team to prepare a report on traffic congestion at Heathrow.
Your report indicates that Heathrow is more likely to experience significant
congestion between July and September than any other time of the year.

Based on your estimates, demand is *Q _{1}^{d}* =
600 – 0.25

*P*, where

*Q*is quantity demanded for runway time slots between July and September. Demand during the remaining nine months of the year is

_{1}^{d}*Q*= 220 – 0.1

_{2}^{d}*P*, where

*Q*is quantity demanded for runway time slots.

_{2}^{d}The additional cost BAA incurs each time one of the 80 different airlines utilizes the runway is £1,100 provided 80 or fewer airplanes use the runway on a given day. When more than 80 airplanes use Heathrow’s runways, the additional cost incurred by BAA is £6 billion (the cost of building an additional runway and terminal). BAA currently charges airlines a uniform fee of £1,712.50 each time the runway is utilized.

What
price should BAA charge for runway slots between July and September?

£

What price should BAA charge for runway slots
for the remaining nine months?

£

2.) Suppose
the European Union (EU) is investigating a proposed merger between two of the
largest distillers of premium Scotch liquor. Based on some economists’
definition of the relevant market, the two firms proposing to merge enjoyed a
combined market share of about two-thirds, while another firm essentially
controlled the remaining share of the market. Additionally, suppose that the
(wholesale) market elasticity of demand for Scotch liquor is -1.2 and that it
costs $15.40 to produce and distribute each liter of Scotch.

Based only on these data, provide quantitative
estimates of the likely pre- and postmerger prices in the wholesale market for
premium Scotch liquor.

**Instruction:** Do not round intermediate
calculations. Round your final answers to the nearest penny (two decimal
places).

Pre-merger price: $

Post-merger price: $

3.) You
are the owner of a local Honda dealership. Unlike other dealerships in the
area, you take pride in your “No Haggle” sales policy. Last year, your
dealership earned record profits of $1.3 million. In your market, you compete
against two other dealers, and the market-level price elasticity of demand for
midsized Honda automobiles is -1.8. In each of the last five years, your
dealership has sold more midsized automobiles than any other Honda dealership
in the nation. This entitled your dealership to an additional 35 percent off
the manufacturer’s suggested retail price (MSRP) in each year. Taking this into
account, your marginal cost of a midsized automobile is $12,000.

What price should you charge for a midsized
automobile if you expect to maintain your record sales?

**Instruction:** Round your answer to two
decimal places.

4.) A
monopoly is considering selling several units of a homogeneous product as a
single package. A typical consumer’s demand for the product is *Q ^{d}* =
100 – 0.5

*P*, and the marginal cost of production is $80.

a. Determine the optimal number of units to put in a package.

units

b. How much should the firm charge for this package?

$

5.) You are the manager of a monopoly that sells a product to
two groups of consumers in different parts of the country. Group 1’s elasticity
of demand is -4, while group 2’s is -6. Your marginal cost of producing the
product is $50.

a. Determine your optimal markups and prices
under third-degree price discrimination.

**Instruction:** Round your answers to two decimal places.

Markup for group 1:

Price for group 1: $

Markup for group 2:

Price for group 2: $