Question

Instructions

Answer these 3 scenarios. Here is a handout

Scenario #1

Scenario #2

Scenario #3

Suppose a price-discriminating monopoly has segregated its market into two sub-markets (Market 1 and Market 2) and can prevent resale between the two. Assume that its marginal cost is $10 and equal to its average total cost of $10. The firm's demand schedule for the first group is given by the first two columns of the table.

Market 1					Market 2
Output	Price	Total Revenue	MR		Output	Price	Total Revenue	MR
0	$24	$0			0	$33	$0
1	22	$22	$22		1	30	$30	$30
2	20	$40	$18		2	27	$54	$24
3	18	$54	$14		3	24	$72	$18
4	16	$64	$10		4	21	$84	$12
5	14	$70	$6		5	18	$90	$6
6	12	$72	$2		6	15	$90	$0
7	10	$70	($2)		7	12	$84	($6)
8	8	$64	($6)		8	9	$72	($12)

Questions:

1. What is the rule for determining the profit maximizing output?
2. Describe how you determine the price a monopoly will charge?
3. What is the profit maximizing output (quantity) for Scenario #1?
4. What is the price will be charged in Scenario #1?
5. In Scenario #1, is the monopoly operating at a profit or loss?
6. In Scenario #1, what is the monopoly’s operating total profit or loss amount in dollars? Write out how you computed this amount.
7. What is the profit maximizing output (quantity) for Scenario #2?
8. What is the price will be charged in Scenario #2?
9. In Scenario #2, is the monopoly operating at a total profit or loss or zero profit? Write out how you computed this amount.
10. In Scenario #2, what is the monopoly's operating profit or loss amount in dollars? Write out how you computed this amount.
11. In Scenario #3, what output level and price will maximize the firm's profit in Market 1?
12. In Scenario #3, what output level and price will maximize the firm's profit in Market 2?
13. Based on your answers for question 11 & 12, which market is more elastic demand?
14. What is this firm’s total economic profit if it price discriminates?

$200 175 150 MC 125 100 ATC 8 75 L 50 0 25 MR 1 23 45 6 78 9 10 Quantity $200 175 MC J 150 ATC U 125 100 AVC 8 75 L 50 0 25 MR 0 1 23 45 6 78 9 10 Quantity

Answer 1

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