1. Suppose a monopolist has the demand schedules. Marginal costs are constant at $13 per unit and MC = ATC at all output levels.
|
Market 1
|
Market 2
|
|
Price
|
Qd
|
Price
|
Qd
|
|
$71
|
0
|
$115
|
0
|
|
63
|
1
|
100
|
1
|
|
55
|
2
|
83
|
2
|
|
48
|
3
|
71
|
3
|
|
42
|
4
|
63
|
4
|
|
37
|
5
|
55
|
5
|
|
33
|
6
|
48
|
6
|
|
29
|
7
|
42
|
7
|
|
25
|
8
|
37
|
8
|
|
18
|
9
|
33
|
9
|
|
11
|
10
|
29
|
10
|
This will give you a chance to work together to understand these problems since you don't have a problem set next week and this topic tends to be challenging for students. As further incentive, you will likely see some price discrimination problems on the Week 8 quiz or final exam.
a) Assume the monopolist produces in market 1 only. If the monopolist charges a single price for output, how much will he produce, what price will he charge, and what profit will he earn?
b) Assume now that the monopolist has identified a second group of buyers which has a different demand schedule shown in market 2 above. Costs are the same as in market 1. What price should the monopolist charge in the second market, how much output will he produce, and how much profit will he make? Assume the monopolist can keep customers in both markets separate.
c) Based solely on the two prices, what can you conclude about the relative elasticities of demand in each market? Explain.
d) Assume that the monopolist can perfectly price discriminate in the first market rather than charging a single price. How much will he produce, what price will he charge, and what profit will he earn in this case? What accounts for the difference in your answers between part b and part d?