QUESTION 1: TRUE or FALSE
A monopolist sells to two markets: in market 1 there is a constant elasticity of demand e1 < -1; in market 2 there is a constant elasticity of demand e2> -1. The monopolist charges a higher price in the market with the "more elastic" demand (i.e., the one with a more negative value of e).
QUESTION 2: Dayna's Doorstops (DD) is a monopolist in the doorstop industry. Its cost function is
C= 100 - 5q q2, and demand is P = 55 - 2q.
a) What price should DD set to maximize profits? What output does the firm produce?
b) How much profit and consumer surplus does DD generate?
c) What would output be if DD acted like a perfect competitor and set MC=P? What profit and consumer surplus would then be generated?
d) What is the deadweight loss from market power in part (a)?
e) Suppose the government, concerned about the high price of doorstops, sets a maximum price at $23. How does this affect price, quantity, consumer surplus (CS), profits, and deadweight loss?
QUESTION 3: Consider the market for a product with two users with the following demand
P1 = 5 - 0.5 Q1.
P2 = 10 - Q2.
Let Mc = 2 be the constant marginal cost of the monopolist.
a) What is the optimal (profit-maximizing) two-part tariff that induces both types of consumers to buy? (Hint: Use the fact that for an inverse demand curve of the form P = a - bQ, consumer surplus at price P is given by CS = (1/2b)(a - P)2).
b) What is the optimal two-part tariff when only high-demand consumers purchase the good?