PART I: Ramsey Pricing in Excel

The file RamseyDemo.xls demonstrates the usefulness of Ramsey pricing to policymakers. In this case, we have 4 types of consumers of electricity. Each consumer has an intercept and an elasticity that came from estimating a log-log demand model (as you have multiple times). This elasticity is used to calculate a consumer specific Ramsey Price according to the optimal marginal cost mark-up rule:

P=k+MC

The marginal cost of producing electricity is a constant $500, and the elasticities are given. The tables show the impact on consumer groups in terms of prices and revenues for uniform pricing (an alternative where everyone pays the same price) and Ramsey Pricing. The goal is to better understand how charging higher prices to the more inelastic groups (smaller ) and lower prices to those who are more price elastic allows us to trade-off between revenue and deadweight loss relative to uniform pricing.

Use the function RamseyDemo.xls, work through the 4 demos. To prove you have gone through the demos, you will have to answer the problems below.

a. In Demo #1, after part (c), report the exact amount (to two digits after decimal) of net revenue under uniform pricing (Cell L9).

b. In Demo #2, after part (c), report the total quantity (to two digits after decimal) under Ramsey Pricing (Cell F8).

c.In Demo #3, after part (b), report the total quantity (to two digits after decimal) under Ramsey Pricing (Cell F8).

d. In Demo #4, after part (b), report the total quantity (to two digits after decimal) under Ramsey Pricing (Cell F8).

Demo a1: Demonstrate that for a given Deadweight Loss (DWL)", Farnsey pricing will yield higher level of net revenue than unitorm pricing. 1. Set unitorm pricing to $500 per unit by changing cell k3 to 600 . You should have a DWL of - $798.77, a. We need to find a value of " k " in cell a9 that will set Ramsey DWL to - $798.77. a. We need to find s va ue of " k " in cel 35 that wir set Ramsey DWL to - 5758.77. ii. In the Gos Seek Options: 5 et cell is to 798.77 by changing cell as C. Ge sure to observe the price changes under Ramsey Frizing notice revenue is now $1 Million under Ramsey, but 90.92 Million under Unitorm pricing. Demo =2 : Demonstrate that for a given Net Revenue, Ramsey Pricing will pield a lower level of DwL than under uniform pricing. 2. Set uniform Pricing to $541.2507116 by changing cell K3. You should have Net Revenue of $900,000 and 0 WL af - $381.30 under uniform pricing. a. We need to find a value of " k " in cel as that wil set Ramsey Net Revenue to $900,000. ii. In the Gos Seek Options: Set cell F9 to 900000 by changing cel a9 iii. The velue of " "k" in cell ag will now be 0.18788 b. With k=0.18783, the Net Revenue is the same under Ramsey pricing ss in Uniform Pricing, but Dwh is now-\$336.s4 under Ramsey, but - $38130 under uniform pricing c. Ae sure to observe the price changes under Ramsey Fricing, natice more ine astic areas are charged higher prices, but the tig gsin comes from cha'ging lower prices to the most elastic areas. d. Nate that Net Revenue-Fixed Costs=\$0, so setting ke0.187ag was equivalent to "Aversge Cost Pricing" in moncooly regulaten. Demo 33 : Demonstrate that Marginal Cost Fricing results in No Deacweight Loss, but the operation would require a 5500,000 subsioy to break even. 3. Maginal Cost Fricing is equiva int to setting k=0. Change cell as to zero. Demo *4: Demonstrate that "Monopoly Frofit Maximizing Price" maximises Net Revenue, but it aress 4. Monopoly pricing ic equivalent to setting k=1. Change Cell 39 to 1 a. Observe that Net Revenue is $1.484 Milion. verity this is profit max by comparing to k=1.09 or k=0.92 b. Observe that oWl is larger when k=1, than any other k that is between zero and one. Demo a1: Demonstrate that for a given Deadweight Loss (DWL)", Farnsey pricing will yield higher level of net revenue than unitorm pricing. 1. Set unitorm pricing to $500 per unit by changing cell k3 to 600 . You should have a DWL of - $798.77, a. We need to find a value of " k " in cell a9 that will set Ramsey DWL to - $798.77. a. We need to find s va ue of " k " in cel 35 that wir set Ramsey DWL to - 5758.77. ii. In the Gos Seek Options: 5 et cell is to 798.77 by changing cell as C. Ge sure to observe the price changes under Ramsey Frizing notice revenue is now $1 Million under Ramsey, but 90.92 Million under Unitorm pricing. Demo =2 : Demonstrate that for a given Net Revenue, Ramsey Pricing will pield a lower level of DwL than under uniform pricing. 2. Set uniform Pricing to $541.2507116 by changing cell K3. You should have Net Revenue of $900,000 and 0 WL af - $381.30 under uniform pricing. a. We need to find a value of " k " in cel as that wil set Ramsey Net Revenue to $900,000. ii. In the Gos Seek Options: Set cell F9 to 900000 by changing cel a9 iii. The velue of " "k" in cell ag will now be 0.18788 b. With k=0.18783, the Net Revenue is the same under Ramsey pricing ss in Uniform Pricing, but Dwh is now-\$336.s4 under Ramsey, but - $38130 under uniform pricing c. Ae sure to observe the price changes under Ramsey Fricing, natice more ine astic areas are charged higher prices, but the tig gsin comes from cha'ging lower prices to the most elastic areas. d. Nate that Net Revenue-Fixed Costs=\$0, so setting ke0.187ag was equivalent to "Aversge Cost Pricing" in moncooly regulaten. Demo 33 : Demonstrate that Marginal Cost Fricing results in No Deacweight Loss, but the operation would require a 5500,000 subsioy to break even. 3. Maginal Cost Fricing is equiva int to setting k=0. Change cell as to zero. Demo *4: Demonstrate that "Monopoly Frofit Maximizing Price" maximises Net Revenue, but it aress 4. Monopoly pricing ic equivalent to setting k=1. Change Cell 39 to 1 a. Observe that Net Revenue is $1.484 Milion. verity this is profit max by comparing to k=1.09 or k=0.92 b. Observe that oWl is larger when k=1, than any other k that is between zero and one