Question

2. Mercedes Benz is a monopolist car manufacturer. Mercedes produces cars at a constant marginal cost (MC) of $15 thousand per car and a fixed cost of $20 million. Cars are sold in two markets: Europe and the US. The demand for its cars in Europe is QE = 18,000 – 400PE and the demand for its cars in the US is QUS = 5500 – 100PUS. Note that, for these demand equations, PE and PUS are in thousands of dollars. a. Suppose that Mercedes can set a different price for its cars in each market. How many cars will it sell in each market and what price will it charge in each market? Compute Mercedes’ overall profits. b. Suppose that Mercedes is forced to charge the same price in both markets. How many cars will be sold and what price will it charge? Compute Mercedes’ profit. c. Does forcing Mercedes to charge the same price in both markets increase or decrease overall welfare?

Answer 1

Qe =18000-400pe

Total Revenue in Europe =Qe*Pe = 18000Pe - 400Pe²

MR = 18000 - 800Pe = MC =15000

3000=800Pe

Pe =3000/800 =3.75

Qe =18000 - 400(3.75) = 16500

Revenue in American market = Qus * Pus =

5500Pus - 100Pus²

MR =5500-200Pus = 15000

B). Adding both the demand functions in this case and taking price as P common for both markets

Total Quantity = 23500 - 500P

Total Revenue =23500P - 500P²

Marginal revenue =23500-500P =MC=15000

8500=500P

P=17

Quantity sold =23500 - 500(17)= 15000

It reduces welfare because the total production of car reduces when same prices are charged.