Assume a monopoly can form any level of output it wishes at a constant marginal cost of $5 per unit. Suppose the monopoly sells its goods in two different markets separated by some distance. The demand curve in the first market is given by
Q1 = 55 - P1
And the demand curve in the second market is given by
Q2 = 70 - 2P2
1. What level of output should be produced in each market and what price will prevail in each market if the monopolist can maintain the separation between the two markets? What are the total profits in this situation?
2. Discuss how would your answer change if there was no separation between two markets and then the firm was forced to follow a single policy?
3. Assume the firm could adopt a linear two part tariff under which marginal prices must equal in the two markets but lump sum entry fees might vary. What pricing policy should the firm follow?