Problem 1 Disneyland hires you as a consultant. Disneyland's business model is the following: it does not charge for entry to the park, but sells tickets at price p that entitle the holder to one ride per ticket. Disneyland understands that it faces many identical consumers with demand curves of the form DU?) = dial6 where D(p) represents number of rides demanded when Disneyland charges price p, and d and 6 are parameters. You can assume d > 0 and 5 > 1. We will refer to 5 as the- of demand. The-produces output y with a cost function where you can assume 0 > 0. 1. We know from the lectures that the o otimal policy of Disneyland involves settin_ rice at a markup a above' How does a depend on them 5? What would happen to ,a if demand were innitely elastic} i.e. 5 = 00? Explain intuitively why 5 and a are related in this way. [5] 2. Ishigher or lower under th-than under perfect competi- tion? What about total welfare?I Why is this the case? Provide an explanation both for consumer surplus and for total welfare. [10] Suppose Disneyland considers charging an entry fee in addition to its per ride price. Denote the entry fee by T and the per ride price price by p. 3. What entry fee should Disneyland impose? What per ride price should they charge? Explain your reasoning. [10] 4. Suppose the owners of Disneyland are richer than its typical customer. Does the introduction of the entry fee raise or lower inequality? Does it raise or lower welfare? [5] Problem 1. l _ 1. Based on the equation: F [5 ') we know that the elasticity of demand tells us the mark-up that the monopolist can charge. The higher the elasticity of dema nd, the lower the mark-up. Ifdemand becomes infinitely elastic, it means any change in price will result in an infinite change in quantity demanded {consumers are extremely sensitive to price changes}. In this case, we cannot determine a finite mark-up because the elasticity of demand is so extreme. It means when demand is perfectly elastic, business can only sell at a single price, any attempt to raise the price above that level would result in the quantity demanded dropping to zero. 2. The consumer surplus and total welfare are both lower under the monopoly than under perfect competition. Under perfect competition: $15926th Total welfare = consumer surplus (CS) + producer surplus {PS} To understand this, firstly we need to know that firms will always produce at optimal Y where marginal revenue (MR) = marginal cost (MC) to maximize profit {If MR>MC, firm will choose to sell one more unit to maximize profit, if MRMC, firm will choose to sell one more unit to maximize profit, if MR