Suppose Forrest owns a firm selling University of Memphis scarves to students, and

he operates as a monopolist. After conducting some market research, he determines

that students tend to have a lower demand for his product than non-students. In

particular, students demand curve for scarves is given by: PS = 16 QS, and non-

students demand curve is given by: PN = 34 QN. Suppose that the monopolist has

zero fixed costs and a marginal cost (MC) that is equal to 2.

a. If his firm is able to charge different prices to students versus non-students, what

prices should he charge, and how much will he sell to each group?

b. Suppose that the government passes a law that makes charging different people

different prices for scarves illegal. Forrest would then have to offer a single price

and quantity associated with the overall (combined) demand. What is the profit

maximizing total quantity he should produce and how much should he charge for a

Snuggie? [Hint: to solve for the new output, you need to first determine the

market demand. To do this, you should first invert both the students and non-

students demand curves (ie., put Q on the left and P on the right), and then add

those two equations together while making a single price P.]

c. Suppose that Forrest opens a second production facility. This second facility has a

constant marginal cost equaling Q. How much of the output produced in part b

should be produced at this new facility, and how much should be produced at the

original facility?