ECO 304K Study Guide - Midterm Guide: Renting, Seating Capacity, Marginal Revenue

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ECO 304K Full Course Notes

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It could sell one additional unit of output if it reduced its price to . 95 per unit. What would be the marginal revenue generated by this additional unit of output: the paramount movie theatre has a seating capacity of 270. On any given night, there are 180 people who would potentially attend a movie at the paramount. There are 80 people who are willing to pay up to. to attend a movie at the paramount, and there are an additional 100 people who are willing to pay up to to attend a movie at the paramount. The total cost (including movie rental, labor, and rent on the theatre) to the theatre owners of showing a movie at the paramount is per night. This cost is the same no matter how many people watch the movie. The next six questions are based on the following situation: let q represent the amount of output produced by a particular firm.

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A monopolist has two types of customers. There are 100 Type A, who will each pay up to $10 for a single unit of the good, and 50 of Type B, who will each pay up to $8. Neither is willing to purchase additional units at any price. If it must charge a uniform price, find that price

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Suppose there are two types of people who need health insurance; high-risk and low-risk consumers. High-risk consumers have a relatively high probability of needing expensive medical care and on average incur $2,000 of medical expenses per year. The high-risk consumers would be willing to pay up to $2,500 for insurance that covers all their medical bills. Low-risk consumers would be willing to pay up to $1,400 for full-coverage insurance and on average would incur on average $1,200 in medical bills. Assume 1/3 of all consumers are high-risk and the remaining 2/3 of consumers are low-risk. Consumers know whether they are high-risk or low-risk. The insurance company knows 2/3 of all consumers are low-risk but cannot identify which consumers are low-risk.

If all consumers bought insurance, what price must the insurance company charge to break even in expectation? That is, what price must the insurance company charge so that the expected payments equals the premium?

Which consumers would purchase insurance at that price?

Are there wealth-creating transactions that are not consummated because of the information asymmetry?

If the low-risk consumers were willing to pay $1,500 for the insurance, how would your answers to questions 2 and 3 change?

1. If all consumers bought insurance, what price must the insurance company charge to break-even in expectation? That is, what price must the insurance company charge so that the expected payments equal the premium?

2. Which consumers would purchase insurance at that price?

3. Are there wealth-creating transactions that are not consummated because of the information asymmetry?

4. If the low-risk consumers were willing to pay $1,500 for the insurance, how would your answers to questions 2 and 3 change?

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ECO 304K Study Guide - Midterm Guide: Renting, Seating Capacity, Marginal Revenue

ECO 304K Full Course Notes

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