1. Suppose a monopoly can produce any level of output it wishes at a constant marginal (and average) cost of $5 per unit. Assume the monopoly sells its goods in two different markets separated by some distance. The demand curve in the first market is given by

Q1 = 55 - P1

And the demand curve in the second market is given by

Q2 = 70 - 2P2

a) If the monopolist can maintain the separation between the two markets, what level of output should be produced in each market, and what price will prevail in each market? What are the total profits in this situation?

b) How would your answer change if there was no separation between two markets and then the firm was forced to follow a single policy?

c) Suppose the firm could adopt a linear two part tariff under which marginal prices must equal in the two markets but lump sum entry fees might vary. What pricing policy should the firm follow?