Problem 1: Assume that the government grants a monopoly to the firm in question 1 in exchange for a licensing fee of $1000 (note the monopolist earns $2560 profit) regardless of how much they produce.

(a). How will this fee affect the profit maximizing price and quantity?

(b). How will this fee affect the monopolist's profit?

(c). Further assume that the government takes the $1000 licensing fee and distributes it as a per unit rebate to consumers who purchase this good. Using equations show what will happen to price and quantity. (Hint: What does the rebate of $1000/Q per unit do the price paid by the consumer?)

(d). Will it make the market more like a competitive market? Will it make the market more efficient (i.e., does it reduce dead weight loss)?

Problem 2: Suppose a gym observed a demand curve of Q = 500 - 10P and a total cost function TC = 3000 + 10Q (where Q represents number of visits and P is the price per visit).

(a). Draw the demand and MC functions

(b). Calculate the competitive equilibrium P, Q, firm's profit (which is also producer surplus) and consumer surplus.

(c) If the gym chooses to implement a two part tariff, what price should they charge per visit? If the gym has had 100 members, and all members are identical-visit the gym equal number of time, what upfront membership fee should they charge?

(d). What is the DWL of the two part tariff. Should we expect all two part tariffs to work so well (from the perspective of the firm) in the real world?