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Monopoly Pricing and Market Analysis

This document contains two problem sets involving monopolies and price discrimination. Question 1 involves a monopolist that charges different prices in two markets with different demand curves, and asks what prices it will charge in each market and how it is affected by a third party entering as a reseller. Exercise 1 involves graphing the demand, marginal revenue, marginal cost, and profit curves for a monopoly and calculating the profit-maximizing output and price, as well as the deadweight loss. Exercise 2 considers a monopoly serving two markets with different demand curves, asks the student to calculate marginal revenue and equilibrium output/prices under third-degree price discrimination, determine which market has a more elastic demand, and calculate total

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Federica Merlo
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37 views2 pages

Monopoly Pricing and Market Analysis

This document contains two problem sets involving monopolies and price discrimination. Question 1 involves a monopolist that charges different prices in two markets with different demand curves, and asks what prices it will charge in each market and how it is affected by a third party entering as a reseller. Exercise 1 involves graphing the demand, marginal revenue, marginal cost, and profit curves for a monopoly and calculating the profit-maximizing output and price, as well as the deadweight loss. Exercise 2 considers a monopoly serving two markets with different demand curves, asks the student to calculate marginal revenue and equilibrium output/prices under third-degree price discrimination, determine which market has a more elastic demand, and calculate total

Uploaded by

Federica Merlo
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Problem Set 9

Question 1
A monopolist sells in two states and practices price discrimination by charging separate prices in
each state. The monopolist produces at constant marginal cost MC = 10. Demand in market 1 is Q1 =
50 – p1. Market 2 demand is Q2 = 90 – 1.5p2. What price will be charged in each market? Suppose a
third party enters the market, not as a producer but as a reseller, capable of reselling by
transporting the goods from market to market at a cost of $4 per unit. How does this affect the
monopolist?

Question 2
Tuan lives in a town with only one movie rental store. Suppose Tuan’s demand for movie rentals
per month is Q = 16 – 2P. The movie store currently charges $5 per movie but is thinking of adding
a flat monthly cardholder fee and dropping the price to $2 per rental. At this new price, what is
the largest cardholder fee that Tuan will pay? If the rental store has a constant marginal cost of $2,
which strategy is more profitable?

Exercise 1
A monopolist faces the following market demand curve: P = 100 - 4q . Her costs are given by the
following function: C q = 20q .

a) Draw the demand curve, the marginal revenue curve (MR) and the marginal cost curve (MC).

b) Compute the monopoly’s profit maximizing sales, and price charged by the monopoly. Represent
them in the previous graph.

c) Compute and draw the area of the profit (Π) of the monopolist.

d) Compute and draw the deadweight loss of monopoly. Why does a monopoly generate a
deadweight loss in total surplus?

e) In what sense (and, in case, by whom) would first-degree price discrimination be preferred?

Exercise 2
Consider a monopoly producing a good Q and serving two markets (market A and market B),
characterized by different demand curves. The inverse demand functions in the two markets are
given by PA=50-QA and PB=30-QB The cost function is C(Q)=20Q, where Q=QA+QB.

a) Compute the marginal revenue functions in the two markets, A and B.

b) Suppose that the monopoly is allowed to fix different prices in the two markets (i.e. it can adopt
third-order price discrimination, i.e., discrimination based on observable customers’
characteristics). Find the equilibrium output and prices
c) Given the results at point b), which group of clients (the one located in market A or the one located
in market B) has a more elastic demand? Motivate your answer.

d) Compute the monopolist total profit.

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