Question

A monopoly sells in two countries . The demand curves in the two countries are p1 = 12−q1, and p2 = 48−q2. The monopoly’s MC is $4.

Now, suppose a long-running trade war between the two countries comes to an end, allowing resales between the two countries. The monopoly is now forced to charge the same price in both countries. The monopoly would have two options: (1) Sell at a price low enough (lower than 12), so that consumers from both countries can buy, or, (2) Keep selling atp = 26, attracting only the customers from the second market.

A) What is the maximal profit (π1 max) the monopoly can make from country 1?

B) What is the smallest loss in profit ∆π = πP =26 − πP ≤12 only from country 2, when the monopoly lowers its price (from 26) to a price low enough to attract consumers from country 1?

(Hint: Do this in two steps. First, find the profit at the $26 price in country 2, and then see its difference from the profit in country 2 at P = 12, to calculate ∆π. Now, argue how MR and MC compare in country 2, for quantities at prices lower than 12, and use this to comment on how ∆πchanges as P drops lower.).

C) Does it seem worth lowering its price (to 12 or below) to attract consumers from country 1 then? Justify your answer in terms of the potential gain and loss in profits(Compareπm1axvs∆π).
Based on your answer in the last part, find the total CS, total profit and total DWL from two countries, under group price discrimination, and then, under the optimal single price monopoly. Argue how Group price discrimination might in- crease consumer welfare and decrease DWL.

Please show work, need done ASAP please thank you!

Answer 1