Question

A monopolist is deciding on the quantity of output to produce in two different countries. Demand for the two countries are:

• ATC = MC = $4

• Q₁ = 12-P₁

  Q₂=12-2p₂

• a. What are price, output, and profits, if the monopolist can price discriminate?
• b. What are price, output, and profits,if the law prohibits charging different prices in the two countries?
• c. Suppose that the monopolist could adopt a two-part tariff, what pricing policy should the firm follow? How do the profits of the monopolist compare to the profits arrived at in part (a) and part (b) above? Under what circumstances is the firm likely to use the two-part tariff pricing?

Answer 1

Lemand' 9,- 12-P =) P, = 12-Q, = 12-28₂. =) a) P2 = 6-12 Q2 $4. Mc- ATC = to tal maximize a) Now the monopolist will profit. JQ, 20 2 Q2 P, Q, + P₂ Q - 4(Q+O) II = (12-26,30, +46-1 Q₂) ₂ - 410,+Q) II - 12- 2Q, - 4 = 0 8=2Q, - 19,=4 6 - Qq -4 = 0 10₂=2 ie Monopolist will produce 4 units in country and charge a price of [P, = 8 and and produce Q = 2 units in country charpe price price IP 5 Profits a 32 + 10 - 4(6) 18 2 iT b) Now P= P = P. so total demand QF Q & Qr. Q- 24-3P. » P- 8- IQ. Profit IT- [8-40]Q - 40 dt - 8- 20 -4 = 0 Q = 6). da a 4 = 20 2

12. 12 Price (p = 67 Profit: = (36)-24 Price c) Under two parte tariff the shonopolist will charge and an entry fee and a pricelp). Therefore, Profit TT116-P)( 12-20) X2 + 012-P) P+ (12-24)P - &19)(12-P) -412-2P). 6 .Entry fee. 4646 T = 2p² – 24P+7.2 + 12 P – p² + 128_202 - 4.8t up - 48+8? -p2 +12P - 24 T dit -2p + 12 = o. de 12 = 28 Pt = 6 Therefore entry fee = 1 (6-6) 112-12) = 0 * - 6 Q = 6 units. Profit = 12. The profit is lower than the part (a) while is same as that in b. obtained under