Problem
I. Mcdonald's, a big burger joint, is charging $6 for its very famous Big Mac hamburger and selling 20 million Big Mac in a year in Singapore.]
i. [Suppose Mcdonald's increases the price of its Big Mac to $6.50. Consequently, quantity sold of the Big Mac falls to 17 million. How much revenue will Mcdonald's gain? What can you infer about the price elasticity of demand (PED) for Mcdonald's Big Mac? Assume in an alternative scenario, the increase in the price of Big Mac to $ 6.5 reduces its quantity sold to 19 million. How much revenue will Mcdonald's gain now? What can you conclude about the PED now?
ii. Given the two scenarios presented in part i, which one do you think is more likely and why? Present evidence to support your prediction.
iii. Suppose Mcdonals's Big Mac and movie tickets have negative cross price elasticity of -0.8. What does this number tell us about the relationship between the Big Mac and movie tickets? Suppose that Golden Village, Singapore's leading cinema exhibitor, decides to increase the price of its movie tickets by 10%. How will this development affect McDonald's pricing decisions as indicated in part (a)? Discuss both the scenarios (as presented in part (a))
II. Suppose 'Car Today' is the only firm selling cars in a small, rural town. Assume that people in the town do not want to leave the town to buy cars. Also assume that there is a constant marginal cost for 'Car Today'.
i. What type of market structure do you think 'Car Today' belongs to? Why? Explain.
ii. Draw a graph for Car Today that shows the firm carrying out perfect price discrimination (first degree). Label the producer surplus, consumer surplus, and deadweight loss in the graph. No explanation required.
iii. Now suppose the city council hears of Car Today's practices and outlaws price discrimination (and assume they can successfully enforce it). Draw a new graph showing what Car Today will do to maximize profits. Label the producer surplus, consumer surplus, and deadweight loss in the graph. No explanation required.