Answer all parts (a)-(e).

1. Answer all parts (a)-(e).

(a) [10 marks] Explain why a monopoly firm providing gardening services is

more likely to succeed with setting non-linear prices than a monopoly firm

selling goods such as plant seeds. [Hint: Focus on the differences in the

characteristics for a consumer who buys a service as opposed to a take home

product such as seeds.]

(b) [10 marks] Outline the procedure for finding the profit maximizing

combinations of price and services offered to customers with unobservable

differences in tastes.

(c) [10 marks] How can such price discrimination improve the efficiency of

markets?

(d) [10 marks] Why do consumers who receive the least consumer surplus

purchase combinations of goods and services in which price that exceeds

marginal cost?

(e) [10 marks] Why might some regard the resulting distribution of consumer

surplus as unfair?

2. Answer all parts (a) and (d).

(a) [15 marks] Suppose a monopolist sells petrol along the A12 in East Anglia

who must decide where to locate its filling stations. What factors determine

the price of petrol and how many filling stations the monopolist will choose to

operate?

(b) [10 marks] Now consider a monopolist selling a single good at just one outlet.

Describe the decision making problem of this monopolist when the monopolist

can choose the quantity and the quality of the good for sale.

(c) [10 points] How does the solution to the problem in (b) differ from the choice

of a social planner who maximizes the unweighted sum of consumer surplus

and firm profit? Will the firm choose a higher or lower quality than the

planner wants?

(d) [15 marks] Now suppose the monopolist in (b) can select to bring a range of

qualities to the market. Explain why the existence of a large consumer surplus

can lead the monopolist to produce fewer goods than the planner would like.

Explain why allowing the monopolist to charge a price above marginal cost

can lead to more goods than the planner would like.

3. [50 marks] What are the possible costs and benefits of so-called persuasive

advertising, i.e. advertising which conveys little or no information regarding price

offers, product characteristics or availability?

END OF SECTION A

EC365-6-SP

3

Section B

4. Answer both parts (a) and (b).

(a) [25 marks] Describe a specific mechanism a regulator can use on monopolist

which has private information about its production costs that achieves an

efficient allocation. Explain the practical problems implementing such

policies.

(b) [25 marks] Describe the difficulties that arise when the regulator instead

decides to impose a rate of return regulatory policy.

5. Answer both parts (a) and (b).

Consider a policy maker who regulates the price of a natural monopoly.

(a) [10 marks] Why might average cost pricing be preferred over marginal cost

pricing?

(b) [15 marks] Why might non-linear pricing be preferred over average cost

pricing?

(c) [25 marks] Why might the policy maker decide instead to auction the

franchise rights to operate the monopoly. What issues arise in carrying out

franchise auctions for monopoly rights?

Hi there,

Would you be able to provide me with rough answers to this exam paper?

The exam is on industrial organizations

Thanks