Tutorial 2
Chapter 26
Monopoly Behaviour
Question 1 (Past paper question)
Suppose that Nando goes out of business so Fernando is the only producer of chicken burgers in the
market. Fernando realises he has two types of customers for chicken burgers, families (M) and
individuals (I). The individual demand for chicken burgers is 𝑄 = 25 − 0.5𝑃 . The family demand
for chicken burgers is 𝑄 = 60 − 2𝑃 . The marginal cost of producing chicken burgers is R10 per
burger.
a) If Fernando can separate the groups, what price per chicken burger should he charge to the
members of each group? What will his total profit be?
b) Discuss the relationship between price discrimination, elasticity, and markup.
Question 2
Suppose a movie distributor charges a movie theatre R4 per ticket sold to rent a movie. The movie
theatre can seat a maximum of 200 people. Suppose that the demand to see the movie is 𝑃 = 10 −
𝑄 𝑄
10 in the afternoon and 𝑃 = 20 − 10 in the evening.
a) Calculate the profit maximising price in the evening and the afternoon, and the number of
people who see each show.
b) What is the amount of revenue paid to the movie distributor?
c) Suppose that the distributor instead asks the theatre owner for a flat fee of R1000 to show a
movie, with no charge per ticket. Calculate whether or not the theatre owner will prefer this
arrangement.
Question 3
A monopoly firm faces two groups of consumers. The inverse demand functions for the two groups
are: 𝑞 = 20 − 𝑝 and 𝑞 = 22 − 𝑝 . The firm is able to discriminate between the two markets.
The total cost function facing the monopolist is 𝐶(𝑄) = 10 + 0.5𝑄 where 𝑄 = 𝑞 + 𝑞 .
a) Which of the two groups has the more elastic demand curve? How do you expect this will
affect the prices each group will pay under 3rd degree price discrimination?
b) Find the profit maximising levels of output and prices for each of the groups.
c) Are the prices calculated in (b) consistent with your predictions in (a)?
d) Which group generates the highest total revenue for the monopolist?
e) Calculate the profit for the monopolist.
Question 4
A firm produces a good in a monopolistically competitive market. The inverse demand curve for its
product is P=50-Q where Q is the quantity of the good produced per week, and P is the price. The
firm can produce one unit of the good at a constant marginal cost of R10 each and has no fixed cost.
Its total cost curve is thus TC=10Q
a) How much of the good will the firm produce each week to maximise profits?
b) What will the price of the good be?
c) How much profit will the firm earn over a week?
d) In reality, firms in monopolistic competition usually face fixed costs in the short run. Given
the information above, what would the firm’s fixed costs have to be for this firm to be in a
long run equilibrium? Explain.
Question 5
You have been assigned to create the annual pricing scheme for a golf course, which typically charges
an annual membership fee and a per-use cost to its golfers. Each of the golfers has a demand curve
for rounds of golf of Q=300-5P where Q is the number of rounds of golf and P is the Price of a round
of golf. If the golf course can provide rounds of golf at a constant marginal cost of R50 and charges
that amount per round of golf, what is the most that members would be willing to pay for their annual
membership fee?