Question

1. A monopolist with marginal cost of production of 40 sells to two distinct consumers. For consumer 1, demand is given by Q1 = 300 - P1. For consumer 2, it is given by Q2 = 180 - P2. a. Determine the optimal uniform price and output when discrimination is impossible. b. Assume third-degree discrimination between the two consumers is possible. What price will be set for each consumer? What quantity will be sold for each consumer? c. How does the discriminatory price relate to the elasticity of demand in each country? d. Assume first-degree discrimination between the two consumers is possible. What is the optimal two-part pricing? What is the optimal block pricing? What quantity will be sold in each? e. Compare the total social surplus of (a), (b) and (d)

Answer 1

Solution-

a) Optimal condition for any monopolist would be set where marginal cost of production is equal to the marginal revenue.

Case 1- Without price discrimination

Case 2

With price discrimination

Price charged in first market is $170 and that in market 2 is $110.

c) As we know that the price charged by the consumers is inversely related to elasticity of demand of consumers, that is when the elasticity of demand is high for a consumer, lower price is charged and when the elasticity of demand is low for a consumer, then higher price is charged.

In country 1, we have price set as $ 170 and in country 2 price is set as $ 110. From this we can infer that, in country 1 we have less elasticity of demand and in country 2 we have more elasticity of demand.

d) At first degree price discrimination, price is set equal to marginal cost.

According to HOMEWORKLIB RULES we are required to solve only till d subparts, for the rest of the parts post separately.