Question 1

In a small town, Luxoctica, a profit maximizing firm, is the sole seller of eyeglasses. In the same town, the weekly demand for eyeglasses is QD= 180 - 2P. Suppose that Luxoctica has a total cost of TC = 0.5Q2 + 100.

a) If Luxoctica must charge the same price on every piece of eyewear (one price monopolist), how many pairs of eyeglasses would it sell? b) In a diagram measuring quantity along the horizontal axis and price along the vertical axis, draw all the necessary curves to illustrate Luxoctica's profit maximizing price and quantity, and highlight the deadweight loss of the monopolist.

c) In equilibrium Luxoctica earns extra-profit. The local government, in need of a new source of revenue, decides to impose a per unit tax on Luxoctica of $20 per piece of eyewear sold. The chair of the local Association for the Protection of the Near and the Far Sighted is very upset fearing that the tax will weigh heavier on consumers than Luxoctica. Do you agree with him/her? Clearly justify your reasoning.

Last, suppose the tax is repealed and that Luxoctica could perfectly price discriminate and sell each pair of eyeglasses at the highest price any consumer is willing to pay for it.

d) To maximize profit, how many pairs of glasses would Luxoctica sell in this case? Clearly explain. Would consumers be better off or worse off?