QUESTION 1 9 points A monopolist faces a demand curve, Q=100-2P and has a constant marginal cost of 10. It has no fixed costs. 22.5 a. If the monopolist can only charge a single price, it should charge P*= 45 and produce Q*= v units. 40 50 b. If the monopolist can charge a separate price for any units sold beyond Q", then the price of these additional units will lead to additional profit if it is any price in the range of 60 v . A monopolist that charges a separate price for additional units is practicing price discrimination 70 80 c. Now suppose that the monopolist can perfectly price discriminate. What quantity will it produce? 0-30 0-10 d. In terms of social welfare, total surplus will be highest in the pricing scheme described in part and lowest in the pricing scheme described in part 10-30 0-50 first-degree second-degree third-degree e. In terms of profitability, profit will be highest in the pricing scheme described in part and lowest in the priceing scheme described in part V intertemporal (a) (b ) ( c ) V QUESTION 3 27.50 30 Merriwell Corporation has a virtual monopoly in the ultra high speed computer market. Merriwell has recently introduced a new computer that will be used by satellite installations around 37.50 the world. The installations have identical demands for the computers. Merriwell's managers have decided to lease rather than sell the computer, but they have been unable to decide whether to use a single hourly rental charge or a two-part tariff. Under the two-part tariff, users would be levied an access charge plus an hourly rental rate. Merriwell's marketing 40 staff estimates a demand curve for each potential user given by P = 45-0.025Q where P = price per hour of computer time, and Q = the number of hours of computer time leased per 200 month. Merriwell offers their users extensive maintenance assistance and technical support. The firm's engineers estimate that marginal cost is $30 per computer hour. Assume fixed costs 250 are zero. 300 If Merriwell charges a single rental rate, the optimal rate is $/hour and the optimal quantity is v. Merriwell's profit in this case is $ 2250 2750 If Merriwell uses a two-part tariff, the access charge is $ and the hourly rental rate would be $/hour. In this case, Merriwell's profit is $ 3000 4500 5000 QUESTION 4 first-degree Tim's Tires sells tires under the firm's own brand name and private label tires to discount stores. The tires sold in both sub-markets are identical, and the marginal cost is constant at $15 second-degree per tire for both types. The firm has estimated the following demand curves for each of the markets: third-degree 15 PB = 70 - 0.0005QB (brand name) 17.5 24.64 Pp = 20 - 0.0002Qp (private label) 30 Quantities are measured in thousands per month and price refers to the wholesale price. 42. 45 By selling the brand name and private label tires at different prices, the firm is using price discrimination. 12,500 25,000 31,250 With price discrimination, the optimal price of brand name tires is and the optimal quantity is v. The optimal price of private label tires is 55,000 67,500 and the optimal quantity is v . The firm's TOTAL profit is (assume fixed costs are zero). 500,000 650,893 If the firm cannot price discriminate and must charge a single price in the market, the optimal price is and the optimal quantity is v . The firm's total 1,255,223 1,512,500 profit in this case is approximately (again, assume fixed costs are zero). 1,543,750 2,000,000 elastic When price discriminating, the firm charges a higher price in the brand name market because demand for brand name tires is more than demand for private label tires. nelastic sensitive That is, consumers of private label tires are more to prices. insensitive