Question

2. Suppose that there is a firm that sells the same good in two different markets and that it is able to prevent resale from the lower priced market to the higher priced market. The direct demand functions for the two markets are given by the following two equations:

Q1 = 8- P1 Q2= 12- P2

Also, the firm produces this good in one plant, so the Total Cost function is given by the following equation:

TC = 5 + 6(Q1+Q2) where Q1+Q2 is total Quantity. (20 pts)

1. Calculate the profit maximizing quantity and price in market 1. Calculate the own price elasticity of demand for market 1 at this quantity and price. Show clearly your work for full credit.

2. Calculate the profit maximizing quantity and price in market 2. Calculate the own price elasticity of demand for market 2 at this quantity and price. Show clearly your work for full credit.

3. What general rule should the profit maximizing monopolist follow with respect to relative prices in the two markets?

4. Given an example of a price setting firm that sells the same good in two different markets for different prices. Remember, the differences in prices are not due to differences in costs due to supplying to the different groups of consumers.

5. What are the two conditions for a price setter that are required for successful price discrimination?

Answer 1