ECON 7110: CONSUMER AND FIRM BEHAVIOUR Problem Set 2 (15%) Due: 4pm, Monday, September 20th, 2021 Questions 1) Educational production a) Write down your personal production function for this course; ????(????, ????, ????, ????) ∈ [0,100] where ???? ∈ [0,11] is the number of lectures you attend/watch, ???? ∈ [0,11] is the number of tutorials you attend/watch, ???? ∈ [0,80] is the effort hours you put into doing individual assignments, and ???? ∈ [0,20] is your individual effort hours in doing the group assignment

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ECON 7110: CONSUMER AND FIRM BEHAVIOUR Problem Set 2 (15%) Due: 4pm, Monday, September 20th, 2021 Questions 1) Educational production a) Write down your personal production function for this course; ????(????, ????, ????, ????) ∈ [0,100] where ???? ∈ [0,11] is the number of lectures you attend/watch, ???? ∈ [0,11] is the number of tutorials you attend/watch, ???? ∈ [0,80] is the effort hours you put into doing individual assignments, and ???? ∈ [0,20] is your individual effort hours in doing the group assignment. For simplicity, assume the start-up pitch group assignment grade only depends on your individual effort ????. (2 marks) Use the function you provide in 1a to answer questions 1b, 1c and 1d. b) What is the value of ????(0,0,0,0) (i.e., what mark do you get for doing nothing at all)? (0.5 marks) c) What is the value of ????(11,11, 80,20) (i.e., what mark do you get for studying as hard as possible? (0.5 marks) d) Does your production function exhibit increasing, decreasing or constant returns to scale (at all or some output levels)? Explain. (2 marks) 2) Pricing a) Provide a real-world example of group (third-degree) price discrimination (with a hyperlink to the example). Discuss what prevents re-sale in your example (i.e., why people who pay a lower price can’t buy and resell the good to people who face a higher price). (2 marks) b) Provide a real-world example of a seller offering a “decoy option”. Discuss how you expect the demand for the other options to change if this decoy option was removed from the market by the seller. (2 marks) c) Provide a real-world example of the “retention-based pricing” idea suggested in the tweet below or discuss why we don’t see many examples of such pricing schemes. (1 mark) The University of Queensland Brisbane QLD 4072 Australia T F +61 7 334 670 64 +61 7 3365 7299 E W k.kalayci@uq.edu.au http://kenankalayci.com/ ABN: 63 942 912 684 CRICOS Provider 00025B 3) Suppose the demand for a new technology, on which the manufacturer has a monopoly, is given by: Q(P, A) = (200 − 2P) × A0.5 where Q is output per period, P is the price, and A is the advertising expenditures. Production costs are given by: C(Q) = 40Q Calculate the profit-maximising price, advertising level, and profits for the firm. (3 marks) 4) Information goods, such as books and video games, exhibit experience good characteristics which can lead to market failures. Using a specific example of an information good, explain how experience good characteristics can lead to a market failure and discuss existing solutions that address the market failure. (2 marks) 2