Question

There is a new pedestrian mall in downtown Nashville. It is one mile in length, and food concessions are not allowed along the mall, only at the ends. A monopolist supplier of ice cream has a shop at either end of the mall. Each hot summer night, N = 4000 people, all hungry for ice cream, stroll the mall.

Shop 1 ------------------------------------------------------ Shop 2 0x 1

Assume that, when the mood for ice cream hits, consumers are evenly spread out along the mall. Each consumer wants only one cone, and is willing to pay a maximum of $6 for it. However, they also experience disutility from having to walk to get the cone, at the (round-trip) rate of $4 per mile of distance to the shop. Suppose that the monopolist’s marginal costs are constant and equal to $2 per cone.

(a) What is the highest price the monopolist can charge if he wants to serve all customers, and what profits will he make?

Answer 1

For monopolist the market equilibrium condition is when Marginal Revenue is equal to Marginal Cost. Here in the given question marginal cost is constant and equal to $2 so for equilibrium this should be equal to marginal revenue so the MR should be $2. So the price he can charge from customers will be $4 so that he can earn a profit of $2.