Question

A single firm produces widgets, with a cost function and inverse demand function as follows,

C(q) = 150 + 2q P(Qd) = 10 ? 0.08Qd

(a) Calculate the monopolist’s profit-maximizing price, quantity, and profit if he can charge a single price in the market (single price monopolist).

(b) Suppose the firm can sell units after your answer to (a) at a lower price (2nd-degree price discrimination, timed-release). What quantity will be sold for what price in this second-tier market? Calculate the monopolist’s profit.

(c) Suppose each new tier of pricing the monopolist introduces increases fixed costs by $2 (quantities can be irrational). What is the profit-maximizing quantity, number of prices, monopolist’s profit, and deadweight loss?

(d) Suppose the firm can perfectly price discriminate (1st-degree) with a 40% increase in marginal cost; calculate the profit-maximizing quantity, monopolist’s profit, and deadweight loss?

(e) Between (c) and (d), which is socially preferred? Which would the monopolist choose to do?

Answer 1