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Question: 1 20 points welfare consequences of market structure compare monopoly...

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1. (20 points) Welfare Consequences of Market Structure. Compare monopoly and monopsony, using the same demand and supply functions. What can be said about their relative effects on producers surplus, consumers surplus, and deadweight loss? Illustrate each market structure with a graph.

2. (15 points) Bundling. A car dealer in Florida once offered bundles of cars to customers, combining sedans with SUVs. (True story.) Four consumers are interested in a particular sedan and SUV, and the dealers best assessment of their reservation prices, in thousands of dollars, is: Consumer Sedan $ 10 thousand $ 8 thousand $ 9 thousand $6 thousand SUV $ 21 thousand $ 22 thousand $ 24 thousand $ 30 thousand The dealers cost for the sedan is $7,000, and for the SUV is $22,500. The dealer cant price discriminate in selling the autos, but can bundle them together. (8 pts) (a) If the dealer were to price the vehicles individually, what price for each would maximize producers surplus, and what would the resulting producers surplus be?

(7 pts) (b) If the dealer bundled the vehicles together, what bundle price would maximize producers surplus, and what would producers surplus be?

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