2. Pindyck & Rubinfeld, 8e. Ch. 11, #5. A monopolist is deciding how to allocate output between two geographically separated markets (East Coast and Midwest). Demand and marginal revenue for the two markets are: P1 = 15 − Q1 MR1 = 15 − 2Q1 P2 = 25 − 2Q2 MR2 = 25 − 4Q2 The monopolist’s total cost is C = 5 + 3 (Q1 + Q2). What are the price, output, profits, and deadweight loss (i) if the monopolist can price discriminate? (ii) if the law prohibits charging different prices in the two regions?

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Asked Dec 11, 2019
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2. Pindyck & Rubinfeld, 8e. Ch. 11, #5. A monopolist is deciding how to allocate output between two geographically separated markets (East Coast and Midwest). Demand and marginal revenue for the two markets are: P1 = 15 − Q1 MR1 = 15 − 2Q1 P2 = 25 − 2Q2 MR2 = 25 − 4Q2 The monopolist’s total cost is C = 5 + 3 (Q1 + Q2). What are the price, output, profits, and deadweight loss (i) if the monopolist can price discriminate? (ii) if the law prohibits charging different prices in the two regions?

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Expert Answer

Step 1

P1 = 15 – Q1        

MR1 = 15-2Q1

P2 = 25 – 2Q2                  

MR2 = 25 – 4Q2

C = 5+ 3(Q1+Q2)

MC = 3

A monopolistic competitive firm maximises its profits, he will produce at a price where Marginal revenue (MR) = Marginal Cost (MC).

Step 2

(i) if the monopolist can price discriminate the:

MR1 = MC

15-2Q1 = 3,

Q1 = 6 units

And P1 = 15 – 6 = $9.

MR2 = MC

25 – 4Q2 = 3

Q2 = 5.5 units

P2 = 25 – 11 = $14

 

Cost (TC) = 5 +3(6+5.5) = 39.5

Total Revenue (TR) = Price * Quantity

Profit = TR-TC = (9*6) + (14*5.5) – 39.5 = $91.5

Dead weight loss 1 = ½ * (price difference between monopoly and perfect competition pricing in market 1) * (quantity difference between monopoly and perfect competi...

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