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Microeconomics 2012-2013 IBA

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Problem set 5: Chapters 11 and 12

Microeconomics 2012-2013 IBA

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CHAPTER 11: Monopoly

Before making the exercises in this problem set, you should finish Homework Week 10,
Chapter 11 and Homework Week 11, Chapter 12 in WileyPlus.

Question 11.1
The monopolist operates following the following total cost curve: TC(Q) = 6Q + 0.05Q.
Market demand for the monopolists production is given by Q = 360 20P.
a) What is the optimal price and qua set by the monopolist? What is the profit of the
monopolist?
b) Make a graphical representation of the optimum.
c) Is the monopolist pricing on the elastic part of the demand curve?
d) Now suppose that the marginal cost curve of the monopolist coincides with the supply
curve in a perfectly competitive market. What would be the market equilibrium price and
quantity? Give a graphical representation.
e) Compare the total welfare in the monopolistic case to the case in which the market is
perfectly competitive.
f) What is the market efficiency of the monopolistic case?
g) What is the value of the Lerner index of the monopoly? Interpret.

Question 11.2
A firm has a monopoly in the production of a software application in Europe. The demand
schedule in Europe is Q1 = 120 P, where Q1 is the amount sold in Europe when the price is
P. The firms marginal costs are 20.
a) What price would the firm choose if it wishes to maximize profits?
b) Now suppose the firm also receives a patent for the application in the US. The demand for
the application in the US is Q2 = 240 2P, where Q2 is the quantity sold when the price is
P. Because it costs essentially nothing to transport software over the internet, the firm
must charge the same price in Europe and the US. What price would maximize the firms
profits?

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Question 11.3
A monopolist is active in a market with demand given by P = 210 - 4Q and his production
process is such that his marginal costs of production equal 10 for all output levels.
a) Calculate the profit maximizing price and output for the monopolist.
b) Suppose that the monopolists marginal costs increase to 20. Calculate the new optimum.
What happened to the total revenues?
c) Assume the market is now served by many firms that all have a marginal cost of 10 for
all output level. What is the market equilibrium?
d) Again, suppose that the firms marginal costs increase to 20. Calculate the new
equilibrium. What happened to the total revenues of the firms?
e) Compare the price increases in the monopoly and the perfect competition case. Interpret.

Question 11.4
A monopolist is active in a market with demand given by P = 210 - 4Q and his production
process is such that his marginal costs of production equal 10 for all output levels.
a) The government feels that the monopolistic price is too high and introduces a maximum
price of 30. Discuss the impact of this regulation.
b) Assume an increase in the marginal costs from 10 to 20 because the government
imposes an excise tax of 10. Discuss the impact of this regulation.
c) When the marginal costs in the monopoly market equal 10, is it a good government
policy to subsidize the monopolist by giving e.g. 10 per unit sold?

Question 11.5
Market demand is P = 64 (Q/7). A multi-plant monopolist operates three plants, with
marginal cost functions:
MC1 (Q1 )

4Q1

MC2 (Q2 )

2 2Q2

MC3 (Q3 )

6 Q3

a) Find the monopolists profit maximizing price and output at each plant
b) How would your answer change if MC2(Q2) = 4?

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CHAPTER 12: Capturing surplus

Question 12.1
A monopolist sells its product on two markets between which price discrimination is possible.
The demand curves are given by:
Q1 = D(P1) = 5 - P1
Q2 = D(P2) = 10 - 5P2
The monopolist produces at a constant marginal cost of 1.
a) Calculate the quantity and the prices in each of the market segments in the equilibrium of
the monopolist. What is the maximal profit of the monopolist?
b) Check whether the lowest price is charged in the more price sensitive market
c) Assume the government intervenes and prohibits the practice of price discrimination.
What would be the optimal price and quantity for the monopolist? What is his maximal
profit now?
d) What is the impact on welfare of the abolishment of price discrimination?
e) Assume the government further intervenes and prohibits outpricing a specific market
segment. To do so, it puts into place a maximum price of 2. What is his maximal profit
now? What is the impact on welfare?

Question 12.2
A firm has a monopoly position on the domestic market due to import restrictions. The
domestic demand is given by: Qdd = 1200 10Pd. The firm however also has the option to
export. The world price is 80. The firm produces using a technology with MC(Q)=50+0.1Q
with Q the total output (domestic and foreign).
How much will the firm sell domestically and abroad and at which price?

Question 12.3
Consider the manufacturer of golf balls in Problem 12.8. The firm faces the demand curve P =
100 - Q, and operates with a marginal cost of 10 for all units produced. Among all the
possible block tariffs (with two blocks), what block tariff structure will maximize profit? In
other words, what choices of P1, Q1 for the first block and P2, Q2 for the second block will
maximize profit?
4

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Question 12.4
Suppose that Acme Pharmaceutical Company discovers a drug that cures the common cold.
Acme has plants in both the United States and Europe and can manufacture the drug on either
continent at a marginal cost of 10. Assume there are no fixed costs. In Europe, the demand for
the drug is QE = 70 - PE, where QE is the quantity demanded when the price in Europe is PE.
In the United States, the demand for the drug is QU = 110 - PU, where QU is the quantity
demanded when the price in the United States is PU.
a) If the firm can engage in third-degree price discrimination, what price should it set on
each continent to maximize its profit?
b) Assume now that it is illegal for the firm to price discriminate, so that it can charge only a
single price P on both continents. What price will it charge, and what profits will it earn?
c) Will the total consumer and producer surplus in the world be higher with price
discrimination or without price discrimination? Will the firm sell the drug on both
continents?

Question 12.5
A cruise line has space for 500 passengers on each voyage. There are two market segments:
elderly passengers and younger passengers. The demand curve for the elderly market segment
is Q1 = 750 - 4P1. The demand curve for the younger market segment is Q2 = 850 - 2P2. In
each equation, Q denotes the number of passengers on a cruise of a given length and P
denotes the price per day. The marginal cost of serving a passenger of either type is $40 per
person per day. Assuming the cruise line can price discriminate, what is the profit-maximizing
number of passengers of each type? What is the profit-maximizing price for each type of
passenger?

Question 12.6
See Question 12.1 Go through the same exercises a) to e) when the demand of segment 1
increases to D(P1)=10-P1.

Question 12.7
Consider the strategy of the monopolist to apply two-part tariffs, when he has a MC=1.
a) Given that the demand in the market is given by D = 5 P, what is the optimal
combination of a fixed fee and price of the monopolist?
b) Assume now that there are 2 market segments, with D1 = 3 - P1 and D2 = 5 - P2. What is
the optimal pricing strategy when the monopolist can observe the types of the consumers
and prevent arbitrage?

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c) Assume the same market segments, with D1 = 3 - P1 and D2 = 5 - P2. What is the optimal
pricing strategy when the monopolist cannot prevent arbitrage? What is total welfare?
Assume that the monopolist will serve both markets.
d) Assume the same market segments, with D1 = 3 - P1 and D2 = 5 - P2. What is the optimal
pricing strategy when the monopolist cannot prevent arbitrage? Assume that the
monopolist will serve only market 2.

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