Aim for FiveMicroeconomics

Long free-response question

One ferry, many fares

  • Units 2 and 4
  • 10 points
  • About 25 minutes

You can use a calculator on this question, just like on exam day.

A long question with several lettered parts built around one scenario, often a firm in a particular market structure, and it can pull in other units such as a labor market or a payoff matrix. You identify outcomes, explain them, do a calculation, and describe a correctly labeled graph that shows the situation and how a change affects it. On the exam: Question 1 of 3 in Section II (60 minutes including a 10-minute reading period; 33.35% of the exam score); 10 points, half of the section score. About 25 minutes suggested. Four-function calculator allowed.

The question and its sources

Islandia Ferries is the only ferry company serving an island; a government license keeps other companies out. The table shows the demand for its tickets. Its marginal cost is constant at $5 per ticket, and it has no fixed costs, so its average total cost is also $5. Assume the company can sell tickets only in blocks of one thousand.

Table 1. Demand for Islandia Ferries tickets

Price per ticketQuantity demanded (thousands of tickets per month)
$181
$162
$143
$124
$105
$86
$67
$48

Source: Hypothetical data

Suggested time: 25 minutes

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Part (a)

1 point

Assume Islandia charges every customer the same price. Calculate the marginal revenue per ticket when it increases sales from 2 thousand to 3 thousand tickets. Show your work.

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Part (b)

1 point

Explain why marginal revenue is less than price when Islandia charges every customer the same price.

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Part (c)

1 point

Identify Islandia's profit-maximizing quantity and price when it charges every customer the same price.

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Part (d)

1 point

Calculate Islandia's monthly profit at the quantity and price you identified in part (c). Show your work.

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Part (e)

1 point

At the price you identified in part (c), is demand for Islandia's tickets price elastic or price inelastic? Explain.

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Part (f)

1 point

Is the single-price outcome allocatively efficient? Explain.

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Part (g)

2 points

Now assume Islandia can perfectly price discriminate, charging each customer the highest price that customer is willing to pay, as shown in the table. (i) Identify the quantity of tickets Islandia sells. (ii) Calculate its monthly profit. Show your work.

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Part (h)

2 points

Compared with the single-price outcome, identify what happens to (i) consumer surplus and (ii) deadweight loss when Islandia perfectly price discriminates. Explain your answer for consumer surplus.

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