Question

1. Consider the market for textbooks in University city, where the market demand is P = 120 − Q (where Q is in thousands) and the Penn bookstore is a monopoly with costs T C = 20Q + 400, MC = $20.

(a) Assume the bookstore cannot price discriminate. Find the profit maximizing price PM and quantity QM, as well as the maximum profit of the bookstore.

(b) Suppose that the University decides to regulate the bookstore, and impose Marginal Cost Pricing while subsidizing the boostore for potential losses. What are the new equilibrium price and quantity? If a lump-sum subsidy (S) is needed, what is it? Explain.

(c) The University board of trustees does not like the idea of subsidizing the bookstore. What other pricing regulation can the University impose on the bookstore? How will the price, quantity and profit compare with marginal cost pricing regulation (from part (1b))? Is this other regulation efficient? Explain.

(d) Suppose a mole in the University transmits all the financial information about students to the bookstore, so that it is able to perfectly price discriminate. Find the corresponding price, quantity and profit for the bookstore.

(e) Using your answers to parts (1a) and (1d), what is the maximum amount Penn bookstore is willing to pay for this information

(f) Is the outcome from part (1d) efficient? Explain.

Answer 1

Hi. Please post subparts in lot of four. Thank you.