1. Suppose a monopolist has a total cost function of TC = 100Q + 1000, where Q is the total number of units he produces. He is able to separate his market into two distinct segments with no possibility of arbitrage, where in market one P1 = 500 -10Q1 and in market two P2 = 300 - 20Q2. This implies that Q = Qi + Q2.

(a) What price and quantity does the monopolist sell in market one?

(b) What price and quantity does the monopolist sell in market two?

(c) What is his total profit?

(d) Calculate price, quantity, and profit if he were unable to separate the two markets (Hint: you will need to sum the demands of the two markets)

2. One common practice employed by multinational firms is "transfer pric¬ing." Multinational firms are typically required to pay taxes to a specific country based upon how much revenue and/or profit they generate within that country. They can often pay less in taxes than non-multinational firms by "manipulating" the books to make it look like the majority of their revenues come from countries with lower tax rates. This is done through what is called transfer pricing in vertically integrated firms.

For example, a firm may have a plant in China in which they make some inter¬mediate product, they ship it to Australia to transform it into a finished good, and sell it here. If tax rates are higher in Australia in China, they will claim that they are selling the intermediate product from China to Australia at a very high price, making a huge profit in China (taxable only in China) and a tiny profit in Australia (taxable only in Australia). If tax rates are lower in Australia, they will sell the intermediate product at a low price (perhaps at a loss) and make a huge profit in Australia.

(a) What type of price discrimination is this? Why?

(b) Who benefits directly from transfer pricing? Who loses? Consider the consumers, producers and governments in Australia and China.