Question

1. Suppose there are two potential customers in the market. One has demand function D₁(p)=10-p . The other has demand function D₂(p)=20-2p. The only firm in this market has constant marginal cost of 2.

(1) Draw the two demand curves in a graph, with price on the vertical axis and demand on the horizontal axis.

(2) (3rd-degree price discrimination) If the monopoly can identify the two consumers and charge different prices to them, what is the optimal price charged to each consumer? At the optimal prices, is there a relationship between price and elasticity of demand?

2. (2^nd-degree price discrimination) Given the market as described in the above question, suppose the monopolist cannot identify the two consumers, but he can use a single two-part tariff.

(1)Find out the optimal fixed fee and per-unit price.

(2)Is it more profitable to serve both consumers or to serve only the one with higher demand?

3. Suppose there are two firms competing in a market. Both firms produce identical products. Firm One is an efficient firm and has total cost function C₁=5q₁; Firm Two is a less efficient firm and has total cost function C₂=10_q2   . Market demand for this product is given by Q=150-2p.

If two firms compete in quantities of production, find out the best response function of each firm and the equilibrium output level of each firm.

Answer 1

Answering only first question as per HomeworkLib policy

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