Exercise 2: Tying in the Paper Industry In Scranton, PA, Sabre Inc. operates as the sole monopolist in the market for printers. But apart from that, they also sell paper for their printers. However, in the paper market there are a lot of competitors, so it's fair to assume that this is a perfectly competitive market. Suppose there are two types of consumers (low and high valuation respectively). Consumers purchase one or zero printers and conditional on buying a printer, their demand for paper is as follows: 9,- p if bought a printer 4: (P) = 0 otherwise Sabre Inc. knows that each type's valuation is: 91 = 20 and 92 = 10. Assume that half of the consumers belong to type 1 and the other half belong to type 2. Denote c0 = 5 as the constant unitary production cost for printers and c = 1 the one for a ream of paper. a) (10 points) If Sabre Inc were to apply a tying selling policy (conditioning the selling of a printer to the selling of reams of paper, in order to avoid competition in this market), what will the prices be for each product? (Hint: Solve the monopolist problem in two separate cases: one in which the monopolist sells only to the high valuation consumers and another one in which it sells to all consumers. The firm will choose whichever yields higher profits) b) (10 points) Worried about aggregate welfare, state senator Robert Lipton proposes to forbid Sabre's product tying policy. If tying is then forbidden, will Sabre Inc sell printers to both types of consumers or will it sell to high type only? c) (5 points) Based on your previous results, what can you say about senator Lipton's regulation policy? Was it successful in increasing consumer surplus