A monopolist sells music CDs. It has a constant marginal and average cost of $20. It faces two groups of potential customers: honest and dishonest customers. The hon- est customers’ demand function for music CDs is Qh = 120 − ph, and the dishonest customers’ demand function is Qd = 120 − pd.
(a) Given that the marginal cost is constant and equal to the average cost, does the monopolist incur any fixed cost? Explain.
(b) Suppose it is not possible for the dishonest customers to steal the music so that both groups of customers are willing to buy the CDs from the monopolist. i. What will be the monopolist’s profit-maximizing output and price? ii. What are the consumer surplus, producer surplus (the monopolist’s profit) and total surplus?
(c) Suppose now the dishonest customers can pirate the music, and thus they are no longer willing to buy the CDs from the monopolist. i. What will be the monopolist’s profit-maximizing output and price? ii. Suppose the dishonest customers, who are now burning the music onto CD-Rs, have to pay $20 for a CD-R. How many pirated copies of the music CD they will have? iii. How will the consumer surplus (of both groups of consumers), producer surplus (the monopolist’s profit) and total surplus change when piracy occurs?