ME Problem Set – IX

PGP 2019 - 21

1. Consider a monopoly selling at a single market where the demand is given by

2. The demand function for tickets for a Coke-studio concert at IIM-Indore varies
between nonstudents (N) and students(S). Formally, the inverse demand functions of
the two consumer groups are given by
= 12 − and = 6− .
Thus, at any given consumption level non-students are willing to pay a higher price
than students.
Assume that the concert’s total cost function is = 10 + 2 where = +
is the total number of tickets sold. Solve the following problems
(a) Suppose the Coke-studio can price discriminate between two consumers groups
by asking students to present their student ID cards to be eligible for a student
discount. Compute the profit-maximizing prices and , the number of tickets
sold to each group of consumers, and total monopoly profit.
(b) Suppose now a local mafia in Indore has distributed a large number of fake
student ID cards, so basically every resident has a student ID card regardless
whether the resident is an IIMI-student or not. Compute the profit-maximising
price, the number of tickets sold to each group of consumers, and the total profit
assuming that the monopoly is unable to price discriminate.

3. Suppose that a monopoly can price discriminate between two markets: market 1,
where the demand curve is given by = 2 − , and market 2 where the demand
curve is given by = 4 − . Suppose that once the product is sold, it cannot be
resold in the other market. That is, assume that arbitrage is impossible, say, due to
strict custom inspections on the border between the two markets. Assume that the
monopoly produces each unit at a cost of = 1.
(a) Calculate the profit-maximizing output level that the monopoly sells in each
market. Calculate the price charged in each market.
(b) Calculate the monopoly’s profit level
(c) Suppose that markets 1 and 2 are now open, and all consumers are free to trade
and to transfer the good costlessly between the markets. Thus, the monopoly can
no longer price discriminate and has to charge a uniform price denoted by =
= . Find the profit-maximising value of .

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4. A discriminating monopoly sells in two markets. Assume that no arbitrage is possible.
The demand curve in market 1 is given by = 100 − . The demand curve in
market 2 is given by = 100 − . We denote the monopoly’s aggregate production
by , where = + . The monopoly’s cost function depends on total production
and is given by = .
(a) Calculate the monopoly’s profit-maximizing quantity sold in market 1 and market
2.
(b) Calculate the profit level of the discriminating monopoly.
(c) Suppose now that a new management assumed of this firm. The young CEO
decides to decompose the monopoly plant into two plants, where plant 1 sells in
market 1 only and plant 2 sells in market 2 only. Calculate the profit-maximizing
output level sold by each plant.
(d) Calculate the sum of profits of the two plants.

5. ImpelTM is the sole producer of memory chips for supercomputers. Each chip costs
c=30 to produce. This monopoly can sell in two markets with the following inverse
demand functions:
= 120 − and = 120 −
(a) Compute the monopoly’s profit-maximizing prices in each market, and ,
sales levels and , and the monopoly’s total profit assuming that ImpelTM can
price discriminate between the two markets.
(b) Now, due to a fire that nearly destroyed its factory, this monopoly cannot produce
and sell more than 160 units. In other words, assume that the production capacity of
ImpelTM is limited to no more than 160 chips. Compute the monopoly’s profit-
maximizing prices in each market, and , sales levels and , and the
monopoly’s profit level.

6. You are an executive for Super Computer, Inc. (SC), which rents out super computers.
SC receives a fixed rental payment per time period in exchange for the right to unlimited
computing at a rate of P cents per second. SC has two types of potential customers of
equal number – 10 businesses and 10 academic institutions. Each business customer has
the demand function Q = 10 – P, where Q is in millions of seconds per month; each
academic institution has the demand Q = 8 – P. The marginal cost to SC of additional
computing is 2 cents per second, regardless of volume.
(a) Suppose that you could separate business and academic customers. What rental fee
and usage fee would you charge each group? What would be your profits?
(b) Suppose you were unable to keep the two types of customers separate and charged a
zero rental fee. What usage fee would maximize your profits? What would be your
profits?
(c) Suppose you set up one two-part tariff – that is, you set one rental and one usage fee
that both business and academic customers pay. What usage and rental fees would you
set? What would be your profits? Explain why price would not be equal to marginal
cost.

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7. As the owner of the only tennis club in an isolated wealthy community, you must decide on
membership dues and fees for court time. There are two types of tennis players. “Serious”
players have demand
Q1 = 10 – P
where Q1 is court hours per week and P is the fee per hour for each individual player. There are
also “occasional” players with demand
Q2 = 4 – 0.25P.
Assume that there are 1000 players of each type. Because you have plenty of courts, the marginal
cost of court time is zero. You have fixed costs of $10,000 per week. Serious and occasional
players look alike, so you must charge them the same prices.
(a) Suppose that to maintain a “professional” atmosphere, you want to limit membership to
serious players. How should you set the annual membership dues and court fees (assume 52
weeks per year) to maximize profits, keeping in mind the constraint that only serious players
choose to join? What would profits be (per week)?
(b) A friend tells you that you could make greater profits by encouraging both types of players
to join. Is your friend right? What annual dues and court fees would maximize weekly profits?
What would these profits be?
(c) Suppose that over the years young, upwardly mobile professionals move to your community,
all of whom are serious players. You believe there are now 3000 serious players and 1000
occasional players. Would it still be profitable to cater to the occasional player? What would be
the profit-maximizing annual dues and court fees? What would profits be per week?

8. Congratulations! You have been appointed the general manager of the PARADISE
Hotel, which is the only hotel on Paradise Island, located somewhere in the Pacific
Ocean. This hotel also owns the only restaurant in town that serves breakfast. As the
hotel manager, your first responsibility is to decide whether to include breakfast in the
standard hotel rate or to charge extra for breakfast. As the hotel manager, your first
responsibility is to decide whether to include breakfast in the standard hotel rate or to
charge extra for breakfast. The table below shows the willingness to pay of type 1 and
type 2 hotel guests for hotel room (R) and for breakfast (B), as well as the expected
number of guests of each type and the hotel’s marginal cost of providing each service.
Guest Type Hotel Room(R) Breakfast (H) Expected number of
guests
Type 1 $100 $5 200
Type 2 $60 $10 800
Marginal Cost =$40 =$2

(a) Compute the hotel’s profit-maximizing room rate , breakfast price , and the
resulting profit , given that both services are sold separately(united).
(b) Suppose now that the hotel rents a room together with breakfast. Compute the
package’s profit-maximizing price and the corresponding profit level .
Conclude whether the hotel should tie the two services in a single package or sell
them separately.
(c) Solve part (a) assuming that the expected number of type 2 guests falls 800 to
= 200 guests, whereas the expected number of type 1 guests remains = 200.

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(d) Solve part (b) under the modification in part (c).

9. Consider a monopoly cable TV operator with unit costs and potential subscribers
described in the following table
Consumer Type CNN BBC HIS No. of subscribers
Type 1 $11 $2 $3 = 100
Type 2 $11 $2 $6 = 100
Type 3 $2 $11 $3 = 100
Type 4 $2 $11 $6 = 100
Marginal Cost = $1 = $1 = $1

The marginal cost of a channel is the fee that the cable operator must pay to the
content provider of this channel for each consumer subscribed to this channel. Solve
the following problems:
(a) Compute the operator’s profit-maximizing subscription rates , and and the
resulting profit , given that each channel is sold separately.
(b) Compute the profit-maximizing subscription rate and the corresponding
profit level , assuming that the operator offers only subscriptions for a singl e
package composed of all three channels.
(c) Can you find alternative packages that would generate a higher profit than that
achieved by pure bundling and no bundling?

10. In Ann Barber there are two suppliers of distilled water, firm A and firm B.
Distilled water is considered to be a homogeneous good. Let p denote the price per
gallon, quantity sold by firm A, and the quantity sold by firm B. Firm A is
located nearby a spring and therefore bears a production cost of = $1 per one
gallon of water. Firm B is not located near a spring, and thus bears a cost of = $2
per gallon.
Ann Barber’s inverse demand function for distilled water is given by
+
= 120 − = 120 −
2 2
(a) Solve for the Counot equilibrium output levels and .
(b) Solve for the aggregate industry supply and the equilibrium price of distilled water
in Ann Barber.
(c) Solve for the profit level made by each firm, and for the aggregate industry profit.