Joe produces cars and he is a monopolist. The demand for cars is P(q) = 10- 0.5q, P is price and q is quantity. Assume that Joe's total cost function is TC(q) = 3q. Assume that Joe chooses how much to produce in order to maximize his profits.
a) Compute the Lerner index. Next, assume that Joe is a third-degree discriminating monopolist operating in two markets. In market A, the demand for cars is P1(q1) = 10 - 0.5q1. We know that, at optimum, the price elasticity of demand in market B is E2 = -13/9
b) Compute the optimal price in market 2