ManagerialEconomicsStudyQuestionsWithSolutions

MonopolyandPriceDisrcimination

1) Ifthegovernmentsetsapriceceilingbelowthemonopolyprice,willthisreducedeadweightlossina
monopolizedmarket?
2) True/False.Aprofitmaximizingmonopolistwillalwaysproduceanoutputthatislessthantheoutputthat
maximizessalesrevenue.
3) Whatistheeffectofalumpsumtaxonamonopolist?
4) Canthegovernmentfindapriceatwhichtoregulateanaturalmonopolythatislowerthanthemonopolists
pricebutgeneratesthesameprofit?
5) True/False.Ifanunregulatedmonopolisticfirmismakingzeroprofit,thenitmustbetruethatpriceequals
minimumaveragetotalcost.
6) Howdoesimposingataxonprofitsaffectthemonopolyoptimumandthewelfareofconsumers,themonopoly
andsociety?
7) Anelectricutilityisgoingtouseablock-pricingschedule.TheyplantochargeP1 forthefirstQ1 unitsandP2
forthesubsequentunits.TheunitssoldatP2 arethetotalunitssold,Q2 ,minusthetotalunitssoldatP1 .The
inversedemandcurveisP=$100-Q,andthemarginalandaveragecostis$40.Usecalculustosolvefor P1 ,
P2 ,Q1 ,Q2 .
8) AmonopolistwithTC=3q2+q+12facesademandcurveofP=81-2q.
i)Findthemonopolypriceandquantity.
ii)FindCSandDWL.
iii)Findtheelasticityofthedemandatthemonopolyequilibrium.
9) Themarketdemandforpeanutsisgivenbyp= 50- 0.5y.SquirellInc.istheonlysupplierofpeanuts.Itstotal
costfunctionisgivenbyTC(y)=10y.Calculate:
i)theprofitmaximizinglevelofoutput,theprofitmaximizingprice,theconsumerssurplus,themonopoly
profits,theburdenofmonopoly(deadweight
loss)
ii)SquirellInc.losesalegalbattleandasaresulthastopaylicensingfeeof$700per
yeartoJiffyLtd.Itstotalcoststhereforeincreaseto TC=10y+700.Withthisnewcostfunction,onceagain
calculate:theprofitmaximizinglevelofoutput,theprofitmaximizingprice,theconsumerssurplus,the
monopolyprofits,thedeadweightloss.
iii)Areyouranswersthesameasinpart(a)ordifferent?Explainwhy.

10) Consideramonopolywithinversedemandfunctionp=24-yandcostfunctionc(y)=5y 2 +4:

i)Findtheprofitmaximizingoutputandprice,andcalculatethemonopolistsprofits.
ii)Nowconsiderthecaseinwhichthemonopolisthasnowanotherplantwiththecoststructurec2 (y 2 )=10y 2 .
Howmuchwillthemonopolistproduceineachplant,whatistheprice,andthetotalprofitsofthemonopoly?
iii)Nowsupposethereisatechnologicalchangeinthefirstplantandithasthefollowingcostfunction: c1 (y 1 )
=2y 1 .Howmuchwillthemonopolistproduceineachplantandwhatistheprice?
11) Amonopolypublishereitherpaysanauthor
i)aroyaltyofxpercentageoftherevenuesfromthebook,or
ii)alump-sumamountofLdollars.
Showhowthecompensationschemeaffectsthepricethepublishersetsandthenumberofbooksthatthe
publishersells.
12) Consideramonopolywithinversedemandfunctionp = 90- 10y andcostfunctionc(y)=10y.
i)Findtheprofitmaximizingoutputandprice,andcalculatethemonopolistsprofits.
ii)Now,supposethegovernmentimposesaperunittaxt=20.Findthenewprice,outputandprofits.
13) Amonopolistfirmfacesthefollowingcostcurve:C(Q)= Q2+ 12,whereQistheoutputproduced.The
demandforitsproductisgivenbyP=24-Q.
i)Findtheequilibriumpriceandquantity.
ii)Findtheprofitlevel.
iii)CalculatetheConsumerSurplus,theProducerSurplusandtheDeadweightLossassociatedtothe
monopoly.
14) Amonopolistfirmfacesthefollowingcostcurve:C(y)=Q 2 +12,whereQistheoutputproduced.Thedemand
foritsproductisgivenbyP=24-Q.
a)DerivetheMRforthisfirm.
b)Findtheequilibriumpriceandquantity.
c)Findtheprofitlevel.
d)CalculatetheConsumerSurplus,theProducerSurplusandtheDeadweightLossassociatedwithmonopoly
pricing.
e)Howdoeschargingthemonopolistaspecifictaxof$8perunitaffectthemonopolyoptimumandthe
welfareofconsumers,themonopolyandsociety(wheresocietyswelfare,orsurplus,includesthetax
revenue)?Whatistheincidenceofthetaxonconsumers?
15) Whatquantitywillaperfectpricediscriminatingmonopolistfacingdemandgivenby P=35-2Q chooseifits
marginalcostisequalto5?
16) Commentonthefollowingstatement:Pricediscriminationcannottakeplaceunlessconsumerscanbeisolated
intogroupsandthegoodscannotbesoldbyonegrouptoothergroups.
17) Commentonthefollowingstatement:Ifamonopolyfacesthepossibilityofsellingtotwomarketswith
differentlineardemandcurvesofequalslopes,itwillchargethesamepriceinthetwomarkets.
18) DoesamonopolistengaginginpricediscriminationstillusetheMR=MCrelationshiptodetermineitsoutput?
19) Providetwoexamplesoftheuseofordinarypricediscriminationpricinginthedailylife.

20) Definepricediscrimination.Whatconditionsmustholdforafirmtobeabletopracticepricediscrimination?
Howareconsumersaffectedbypricediscrimination?
21) Amonopolisthastotalproductioncostsgivenby0.5 Q2 .Thedemandfunctioninthehomemarketis P=200.5Q
a)Ifthemonopolistsellsallitsoutputtothehomemarket,whatistheequilibriumpriceandquantity?
b)Nowsupposethemonopolisthasachoicebetweenthehomemarketandaforeignmarketinwhichthe
monopolistcansellanyamountQatapriceof$12.Willthemonopolistsellintheforeignmarket?Ifyes,what
wouldhappentothepricethemonopolistchargesinthehomemarket?
22) Amonopolistoperatesintwomarketswhosedemandfunctionsare p1= 120- q1 andp 2=100- 0.5q2 .The
monopolisthasaconstantmarginalcostof$20.
a)Findthepricesandmarketquantitieswhenthemonopolistcanpricediscriminatebetweenthetwomarkets.
b)Findtheoutputineachmarketifpricediscriminationisimpossible.
c)Showthatthetotaloutputq1+q2 isthesameinparta.andb.
23) Aspecializedricegrowersellsriceintwomarkets,theUnitedStatesandJapan,andthemarginalcostthe
sameinbothmarkets.ThepriceelasticityofdemandintheUnitedStatesis-2.0,andthepriceelasticityof
demandinJapanis-1.5.Ifthegrowerpracticesmultimarketpricediscrimination,whichcountrysconsumers
willpayahigherpriceandbyhowmuch?
24) Aweaponsproducersellsgunstotwocountriesthatareatwarwitheachother.Thegunscanbeproducedata
constantmarginalcostof$10.Thedemandforgunsfromthetwocountriescanberepresentedas:
QA=100-2p
QB=80-4p
Whyistheweaponsproducerabletopricediscriminate?
Whatpricewillitchargetoeachcountry?
25) Amonopolistoperatesintwomarketswhosedemandfunctionsarep 1= 100- q1 andp 2=120- 0.5q2 .The
monopolisthasaconstantmarginalcostof$40.
a)Findthepricesandmarketquantitieswhenthemonopolistcannotpricediscriminatebetweenthetwo
markets.
b)Calculatethepriceelasticityforeachmarketdemandandevaluateitatthepriceandquantitiesderivedina.
Ifthemonopolistisallowedtousepricediscrimination,whichoneofthetwomarketswillhaveahigherprice?
Why?
c)Findthepriceandmarketquantitieswhenthemonopolistcanpricediscriminatebetweenthetwomarkets.
d)Willtheconsumersinthefirstmarketbebetteroffwithdiscriminationornot?Whatabouttheconsumersin
thesecondmarket?
26) Amonopolistcansellintwoseparatemarketswithdemandcurves p 1= 160- 8q1 andp2=80- 2 2. The
monopolistsmarginalcostis5+Q.Whatwillbethepriceschargedbythemonopolistinthetwomarkets?
Whatarethequantitiessoldinthetwomarkets?

27) BetweenOttawaandTorontoIsland,PorterAirhasamonopolyintwomarkets,oneforstudentswhoare
willingtoflyonastandbybasis,andoneforbusinesspeoplewhoarenot.Themarginalcostofaseatona
planethatisnotfilledtocapacityiszero.ThedemandfunctionofallstudentscombinedisQ S=500-25PSand
thedemandfunctionofallnon-studentscombinedisQ N=4000-10PN.Iftheairlinecanengageinordinary
pricediscriminationanditsplanesarenotfilledtocapacity,find:
a)Thepricetostudents.
b)Thepricetonon-students.
c)Thedeadweightlossinthemarket.
d)Supposepricediscriminationbetweenstudentsandnon -studentsisillegal.Whatisthedeadweightlossin
themarket?
28) AfirmsdemandcurveisgivenbyP= 500- 2Q.Thefirmscurrentpriceis$300andthefirmsells100unitsof
outputperweek.
a.
b.

Calculatethefirmsmarginalrevenueatthecurrentpriceandquantityusing
theexpressionformarginalrevenuethatutilizesthepriceelasticityofdemand.
Assumingthatthefirmsmarginalcostiszero,isthefirmmaximizingprofit?

29) Determinetherule-of-thumbpricewhenthemonopolisthasamarginalcostof$25andthepriceelasticityof
demandof-3.0.
30) TheMetroElectricCompanyproducesanddistributeselectricitytoresidentialcustomersinthemetropolitan
area.Thismonopolyfirmisregulated,asareotherinvestorownedelectriccompanies.Thecompanyfacesthe
followingdemandandmarginalrevenuefunctions:
P=0.04-0.01Q
MR=0.04-0.02Q
Itsmarginalcostfunctionis:
MC=0.005+0.0075Q,
whereQisinmillionsofkilowatthoursandPisindollarsperkilowatthour.Findthedeadweightlossthat
wouldresultifthiscompanywereallowedtooperateasaprofitmaximizingfirm,assumingthat P=MC
underregulation.
31) HawkinsMicroBreweryhasamonopolyonOatmealStoutinthelocalmarket.Thedemandis:
1
QD=100-2PP=50- Q. TheresultingmarginalrevenuefunctionisMR(Q)=50-Q.Hawkins
2
1
marginalcostofproducingOatmealStoutisMC(Q)=5+ Q.CalculateHawkinsprofitmaximizingoutput.
2
CalculatethesocialcostofHawkinsmonopolypower.

32) JohnGardneristhecityplannerinamedium-sizedsoutheasterncity.Thecityisconsideringaproposalto
awardanexclusivecontracttoClearVision,Inc.,acabletelevisioncarrier.Mr.Gardnerhasdiscoveredthatan
economicplannerhiredayearbeforehasgeneratedthedemand,marginalrevenue,totalcostandmarginal
costfunctionsgivenbelow:
P=28-0.0008Q
MR=28-0.0016Q
TC=120,000+0.00062
MC=0.0012Q,
whereQ=thenumberofcablesubscribersandP=thepriceofbasicmonthlycableservice.Conditionschange
veryslowlyinthecommunitysothatMr.Gardnerconsidersthecostanddemandfunctionstobereasonably
validforpresentconditions.Mr.Gardnerknowsrelativelylittleeconomicsandhashiredyoutoanswerthe
questionslistedbelow.
a.
b.

c.

Whatpriceandquantitywouldbeexpectedifthefirmisallowedtooperate
completelyunregulated?
Mr.Gardnerhasaskedyoutorecommendapriceandquantitythatwouldbe
sociallyefficient.RecommendapriceandquantitytoMr.Gardnerusing
economictheorytojustifyyouranswer.
Comparetheeconomicefficiencyimplicationsof(a)and(b)above.
Youranswerneednotincludenumericalcalculations,butshouldinclude
relevantdiagramstodemonstratedeadweightloss.

33) CallowayShirtManufacturerssellsknitshirtsintwosub-markets.Inonemarket,theshirtscarryCalloways
popularlabelandbreastlogoandreceiveasubstantialpricepremium.Theothersub -marketistargeted
towardmorepriceconsciousconsumerswhobuytheshirtswithoutabreastlogo,carryingthename
Archwood.TheretailpriceoftheshirtscarryingtheCallowaylabelis$42.00whiletheArchwoodshirtssell
for$25.Callowaysmarketresearchindicatesapriceelasticityofdemandforthehigherpricedshirtof -2.0,
andanelasticityfortheArchwoodshirtsof-4.0.Moreover,theresearchsuggeststhatbothelasticitiesare
constantoverbroadrangesofoutput.
a.
b.

AreCallowayscurrentpricesoptimal?
Managementconsidersthe$25pricetobeoptimalandnecessarytomeetthe
competition.WhatpriceshouldthefirmsetfortheCallowaylabeltoachieve
anoptimalpriceratio?

34) AmericanTireandRubberCompanysellsidenticalradialtiresunderthefirmsownbrandnameandto
discountstoresforprivatelabeling.Marginalcostisaconstant$10pertire,regardlessofthesub -marketin
whichthetireissold.Thefirmhasestimatedthefollowingdemandcurvesforeachofthemarkets.
PB=70-0.0005QB(brandname)
PP=20-0.0002QP(privatelabel).
Quantitiesaremeasuredinthousandspermonthandpricereferstothewholesaleprice.Americancurrently
sellsbrandnametiresatawholesalepriceof$28.50andprivatelabeltiresforapriceof$17.Aretheseprices
optimalforthefirm?

35) Thelocalzoohashiredyoutoassisttheminsettingadmissionprices.Thezoosmanagersrecognizethatthere
aretwodistinctdemandcurvesforzooadmission.Onedemandcurveappliestothoseages12to64,whilethe
otherisforchildrenandseniorcitizens.Thetwodemandandmarginalrevenuecurvesare:
PA=9.6-0.08QA
MRA=9.6-0.16QA
PCS=4-0.05QCS
MRCS=4-0.10QCS
wherePA=adultprice,PCS=childrens/seniorcitizensprice,QA=dailyquantityofadults,andQCS=daily
quantityofchildrenandseniorcitizens.Crowdingisnotaproblematthezoo,sothatthemanagersconsider
marginalcosttobezero.
a.
b.

Ifthezoodecidestopricediscriminate,whatshouldthepriceandquantitybe
ineachmarket?Calculatetotalrevenueineachsub-market.
Whatistheelasticityofdemandatthequantitiescalculatedin(a)foreach
market.Aretheseelasticitiesconsistentwithyourunderstandingofprofit
maximizationandtherelationshipbetweenmarginalrevenueandelasticity?

36) MerriwellCorporationhasavirtualmonopolyintheultrahighspeedcomputermarket.Merriwellhas
recentlyintroducedanewcomputerthatwillbeusedbysatelliteinstallationsaroundtheworld.The
installationshaveidenticaldemandsforthecomputers.Merriwellsmanagershavedecidedtoleaserather
thansellthecomputer,buttheyhavebeenunabletodecidewhethertouseasinglehourlyrentalchargeora
two-parttariff.Underthetwo-parttariff,userswouldbeleviedanaccesschargeplusanhourlyrentalrate.
Merriwellsmarketingstaffestimatesthedemandandmarginalrevenuecurvesbelowforeachpotentialuser:
P=45-0.025Q
MR=45-0.05Q,
whereP=priceperhourofcomputertime,andQ=thenumberofhoursofcomputertimeleasedpermonth.
Merriwellofferstheirusersextensivemaintenanceassistanceandtechnicalsupport.Thefirmsengineers
estimatethatmarginalcostis$30percomputerhour.
a.
b.

c.

AssumingthatMerriwellchoosestosetasingleprice,whatwillthefirmsprice
andoutputbe?
AssumingthatMerriwellusesatwo-parttariff,whataccesschargeand
hourlyrentalfeeshouldthefirmset?Comparethefirmsrevenuesunderthe
optionsin(a)and(b).
Brieflydescribehowdifferingdemandcurvesamongthevariousbuyers
wouldalterthetwo-parttariff.

37) Theindustrydemandcurveforaparticularmarketis:
Q=1800-200P.
Theindustryexhibitsconstantlongrunaveragecostatalllevelsofoutput,regardlessofthemarketstructure.
Longrunaveragecostisaconstant$1.50perunitofoutput.Calculatemarketoutput,price(ifapplicable),
consumersurplus,andproducersurplus(profit)foreachofthescenariosbelow.Comparetheeconomic
efficiencyofeachpossibility.
a.
b.
c.

PerfectCompetition
PureMonopoly(hint:MR=9-0.01Q)
FirstDegreePriceDiscrimination

AnswerKey
Testname:6500_MONOPOLY_LONG_PROBLEMS

1) Yes,aslongasthepriceceilingisnotsettoolow.Thepriceceilingbecomesthemonopolistsmarginalrevenue(upto
thequantitydemandedatthatprice,atleast).Sincethemonopolistsnewmarginalrevenuecurveisbelowtheold
one,thefirmsMCwillintersectMRatahigherlevelofoutputandthemonopolistwillproducealevelofoutput
closertothesociallyoptimallevelofoutput,therebyreducingthedeadweightloss.
2) TrueunlessMC=0.SalesaremaximizedwhenMR(y 1 )= 0(Notethatthisisnotthepointwherep= MC)andprofits
aremaximizedwhenMR(y 2 )=MC(y 2 ).y 2 andy 1 arethesameonlywhenMCisequaltozero.
3) Ifthefirmsprofitsarelargerthantheamountofthelumpsumtax,therewillbenoeffectasalumpsumtaxislikea
fixedcostanddoesaffectthefirmsmarginalcostsormarginalrevenues.Ifthefirmisearninglessthantheamountof
thetaxinprofits,thetaxwillresultinthefirmmakingaloss.Thefirmwillnotchangeoutputorpriceintheshortrun;
butitwillexittheindustryinthelongrun.
4) No.Atanypricebelowthemonopolistsprice,MR< MCimplyingthattheincreaseinrevenuesfromthelastunit
producedwaslessthantheincreaseincosts.Atanypriceabovethemonopolyprice,MR >MCimplyingthatifthe
firmcouldincreaseitsoutput(i.e.,loweritsprice),itwouldincreaseitsrevenuesmorethanitwouldincreaseitscosts,
therebyresultinginanincreaseinprofits.
5) False.Whenthemonopolypriceisequaltotheaveragecost,theprofitisindeedzerobutthisdoesnthavetobe
minimumAC.
6) Ataxonprofitsdoesnotchangethequantitynorthepricechosenbythemonopolistsinceprofitaftertax = (1-t)*
profitbeforetax=(1-t)*(revenue-costs),wheretisthetaxrateontheprofits.Well,thistaxwillnotchangethe
quantitychosenbythemonopolist(Why?)andasaconsequencewillnotchangetheprice.Wehavethesamesurplus
andthesamedeadweightlossaswithoutataxonprofits.Thedifferenceisthatpartoftheproducersurplusnowgoes
tothegovernmentintheformoftaxes.
7) Theprofitequationforthisutilityis=P1 (Q1 ) Q1 + P2 (Q2 ) (Q2 - Q1 )- 40Q2 .Thederivativeofprofitwith
respecttoQ1 is100-2Q1 -100+Q2 .ThederivativeofprofitwithrespecttoQ2 is100-2Q2 +Q1 -40.Bysetting
thesetwoderivativesequaltozeroandsubstituting,Q1 equals20andQ2 equals40.Substitutingthequantitiesinto
theinversedemandcurve,P1 equals$80andP2 equals$60.
8) i)MC=6q+1andMR=81-4q.SetMC=MRandyouget10q = 80orq = 8.P isfoundbypluggingqintothe
demandcurve:p=81-2(8)=65.
ii)CS=64;DWL=16.
iii)E=-65/16.
9) i)y=40,p=30,CS=400,Profit=800,DWL= 400;
ii)y=40,p=30,CS=400,Profit=100,DWL=400;
iii)theyarethesame.Alumpsumtaxreducesprofitbutdoesnotinfluencetheprofitmaximizingpriceandquantity.
10) i)p=22;y=2;profit=20;
ii)y 1 =1;y 2 =6;p=17;profit=50;
iii)(y 1 ;y 2 )=(11;0)andp=13.
11) i)Thepublishersobjectiveistomaximizeprofits.LetProfit(Q)denoteprofitswhenthemonopolistproducesQ.The
monopolistmaximizesProfit(Q)=P(Q)*Q-C(Q),whereC(Q)isthecostfunction.
Underscheme(i),themonopolistmaximizesProfit(Q)=(1-x)P(Q)*Q-C(Q).
Ifdemandislinear,P(Q)=a-bQ,then(1-x)P(Q)*Q=(1-x)a-(1-x)bQ.Soitisasifthemonopolistfacesanew
(inverse)demandcurvewhichhasalowerP-interceptandthesameQ-intercept.ThemarginalrevenueMR(Q)=a2bQwillchangeinthesamemanner.Thatis,MR(Q)=(1-x)a-(1-x)2bQ.Sincemarginalcosthasnotchanged,
quantityandpricewillchangeunderthisscheme.
Notethatthepublisherreceives(1-x)p tforeachunitsoldandconsumerspayp t>p *inthenewequilibrium.The
numberofbookssoldinthenewequilibriumisQt<Q *.
Underscheme(ii),themonopolistmaximizesProfit(Q)=P(Q)Q-C(Q)-L.Themarginalrevenueandmarginalcost
areNOTaffectedbyalump-sumtax.Hencethereisnochangeinthe(p *,Q*)withalump-sumtax.Theonlything
thatwillbeaffectedunderthelump-sumschemeisthepublishersprofit.
7

AnswerKey
Testname:6500_MONOPOLY_LONG_PROBLEMS

12) i)y=4,p=50,profit=160.
ii)y=3,p=60,profit=90.
13) i)MR=MC,soQ=6.NowplugthisQinthedemandcurvetogetP = $18.
ii)profit=$60.
iii)CS=$18,PS=$72,DWL=$6.(Thebestwaytofigureoutthesevaluesistodrawagraph.)
14) a)MR=24-2Q.
b)Q=6,P=$18.
c)profit=$60.
d)CS=$18;PS=$72;DWL=2*6/2=$6
e)ThetaxherewillaffecttheMCandthenthequantityproducedandthepricecharged.
Q=4andP=$20.ThetaxwillreducetheCSandPSandwillproducetaxrevenuetothegovernmentof$32.Finally,
theDWLwillincreaseaswemovefurtherfromthecompetitiveequilibrium.Also,theconsumerwillpayonlypart
ofthetax.Noticethatthenewpriceis$20.Andthepricebeforetaxwas$18.So,consumersonlypay2/8ofthetax.
Themonopolistpaystherest.3
15) Foraperfectpricediscriminatingfirm,P= MR sinceitdoesnothavetoloweritspricetoothercustomerstoincrease
itssales.Therefore,wehaveMR=35-2Q.Asalways,thefirmsetsMR=MCtofinditsquantity.Thisyields35-2Q
=5or30=2QorQ=15.
16) Thetwoconditionsareessentialforsuccessfulpricediscrimination.Themonopolisthastobeabletodistinguish
betweentwoormoregroupsofconsumerswithdifferentwillingness(andability)topayforthegoodssold.Also,in
ordertopreventarbitrageinitiatedbythelow-pricecustomers,themarketshavetobesegmented.Otherwise,the
monopolistmayfinditlessprofitabletoengageinpricediscrimination.
17) Providedthemarketsegmentationisfeasible,themonopolistwillengageinordinarypricediscrimination.Inthecase
ofdistributingagivenamountofoutputtothetwomarkets,theallocationwillrequiretheequalizationofthe
marginalrevenueinthetwomarkets,andthisconditioncannotresultinchargingthesamepriceinthetwomarkets.
Alternatively,thetwodemandcurveshavedifferentpriceelasticityofdemand,andthereforethereisscopeforprice
discrimination.
18) Yes.Theprofit-maximizingmonopolistabletoengageinordinarypricediscriminationwillchooseanaggregate
outputwhereaggregatemarginalrevenueisequaltomarginalcost,andwillallocatethatoutputsothatmarginal
revenueisidenticalinallmarkets.
19) Theuseofcouponbooksinthegrocerystoresallowspricediscriminationbetweenbusypeoplethatdonothavetime
toclipcouponsandthosethatdo.TheuseofpictureIDsallowspublictransitcompaniestosegmentthemarkets
formedbyadultstravelingtowork(highabilityandwillingnesstopay),andbyseniorcitizensandstudents(low
abilitytopay).
20) Pricediscriminationischargingdifferentpricestodifferentconsumersforthesameproduct;inotherwords,price
differentialsthatdonotreflectcostdifferentials.Thethreeconditionsare:firmsmustpossessmarketpower,must
segmentthemarket,andmustpreventresale.Whilesomeconsumersmayenduppayinghigherpricescomparedto
otherconsumers,asawhole,consumersmayactuallybebetteroffsincethemonopolisthasincentivestoselltomore
people(therebyeliminatingdeadweightloss).
21) a)p=15;
b)Yes,themonopolywillsell4unitsintheforeignmarketand8unitsinthedomesticmarket;Thepriceinthe
domesticmarketwillincreaseto16.
22) a.q1=50,q2=80,p 1=70,p 2=60;
b.q1=170/3,q2=220/3,p=190/3;
c.q1+q2=130inbotha.andb.
23) pus(1+1/-2)=pj(1+1/-1.5).Rearrangingyieldsp us= (2/3)pj.ThepriceintheUnitedStateswillbe2/3thepricein
Japan.

AnswerKey
Testname:6500_MONOPOLY_LONG_PROBLEMS

24) Thefirmcanpricediscriminatebecausetherearetwoidentifiablesegmentswithdifferentelasticities.Sincethetwo
countriesareatwar,resaleisdoubtful.Tosolve,findmarginalrevenueforeachandsetequaltomarginalcostof$10.
MRB=20-(1/2)QB=10orQB=20andpB=15.
MRA=50-QA=10orQA=40andpA=30.
25) a)CalculatetheaggregatedemandandthenaggregateMR.SetitequaltoMCandget Q=110,p=230/3,q1= 70/3,
andq2=260/3withoutdiscrimination.
b)E1=-3.2.E2=-1.7.Typetwoconsumerspaymorewithdiscrimination.
c)P1=210/3,p 2=240/3,q1=90/3,q2=240/3withdiscrimination
d)Typeoneconsumerswillbeworseoffsincetheylose3805/9inconsumersurplus.Typetwoconsumersarebetter
offwithdiscriminationsincetheygain2500/9inconsumersurplus.
26) p 1=53.33,p 2=63.33,q1=13.33,q2=8.33.
27) a)10;b)200;c)201,250;d)205,000.
28) a.
Beginbycalculatingthepriceelasticityofdemand,ED:
Q P

ED=
P Q
Tofind

Q
solveforQintermsofP.
P

P=500-2Q
P-500=-2Q
Q=250-0.5P
Q P
Q
=-0.5;ED=

P Q
P
ED=-0.5

300
=-1.5
100

MR=P+P

1
ED

MR=300+300

1
-1.5

MR=300-200=100
b.
IfMC=0,thefirmisnotmaximizingprofitsinceMRshouldbeequaltoMC.Thefirmshouldexpandoutput.
MR=500-4Q=0
4Q=500
Q=125
29) Useequation(10.2)fromthetext,andsolveforprice.
MC
$25.00
=
=$37.50
P=
1
1
1+
1+
ED
-3

AnswerKey
Testname:6500_MONOPOLY_LONG_PROBLEMS

30) Findtheareabetweentheaveragerevenuecurveandthemarginalcostcurvethatisboundedbytheratesof
productionchosenfirstbytheprofitmaximizingmonopolyandsecondbytheregulatedindustryhavingthesame
coststructure.
MonopolyoutputisdenotedQMandisfoundwhereMC=MR.
0.04-0.02Q=0.005+0.0075Q
QM=1.2727(inmillionsofKWH)
Theregulatedindustryoutputtakesplacewhereaveragerevenueequalsmarginalcost.
R
AR= =0.04-0.01Q
Q
0.04-0.01Q=0.005+0.0075Q
Q=2(inmillionsofKWH)
ThearearepresentingdeadweightlossistheareaundertheARcurveminustheareaundertheMCcurvebetweenQ
=2andQ=1.2727.
AreaunderARiscomputedbyfirstfindingtheheightsofARatthetwoquantities.
AtQ=2,AR=0.04-0.01(2)=0.04-0.02=0.02
AtQ=1.2727,AR=0.04-0.01(1.2727)=0.04-0.012727=0.02727.
0.02+0.02727
=0.023636
TheaverageAR=
2
Area=(2-1.2727)(0.023636)=0.01719
TheareaunderMCis
AtQ=2,MC=0.005+0.0075(2)=0.02
AtQ=1.2727,MC=0.005+0.0075(1.2727)=0.014545
0.02+0.014545
Averageheight=
2
TheareaunderMCis
Area=(2-1.2727)(0.01727)=0.01256
Deadweightloss=0.01719-0.01256
=0.00463inmillionsofdollars
=$4,630/timeperiod.

10

AnswerKey
Testname:6500_MONOPOLY_LONG_PROBLEMS

31) Hawkinswillsetmarginalrevenueequaltomarginalcosttofindoptimaloutput.
1
MR(Q)=50-Q=MC(Q)=5+ QQ=30.Atthisoutputlevel,Hawkinscharges$35perunit.Thechokepriceis
2
$50whileHawkinsreservationpriceis$5.Consumersurplusis
1
CS= (50-35)30=225.ProducersurplusisPS=0.5(20-15)(30)+(35-20)(30)=675.Totalsurplusinthelocal
2
OatmealStoutmarketis$900whenHawkinshasmonopolypower.IfHawkinsdidnothavemonopolypower,the
priceofOatmealStoutwouldequalHawkinsmarginalcost.Wecanfindthisoutputlevelbysettingconsumersprice
1
1
asafunctionofoutputequaltoHawkinsmarginalcost.P=50- Q=MC=5+ QQ=45.Atthisoutputlevel,
2
2
1
thepriceofOatmealStoutis$27.50.ConsumersurplusisCS= (50-27.50)45=506.25.Producersurplusis
2
1
PS= (27.50-5)45=506.25.TotalsurpluswhenHawkinsdoesnothavemonopolypowerwouldbe$1,012.50.
2
Thus,societyloses112.50ofsurplusduetoHawkinsmonopolypowerinthelocalOatmealStoutmarket.

11

AnswerKey
Testname:6500_MONOPOLY_LONG_PROBLEMS

32) a.
Withoutregulationwewouldexpectthefirmtobehaveasamonopolist,equatingMRandMC.
28-0.0016Q=0.0012Q
Q=10,000
P=28-0.0008(10,000)
P=$20
b.
EconomictheorysuggeststhatpriceshouldbeequaltoMCtoachieveallocativeefficiency.
P=28-0.0008Q
MC=0.0012Q
28-0.0008Q=0.0012Q
28=0.002Q
Q=14,000
P=28-0.0008(14,000)
P=28-11.20
P=16.80
c.
In(a),thepriceishigher($20asopposedto$16.80),andquantitylower(10,000asopposedto14,000).The
monopolistshigherpriceandsmallerquantityresultinadeadweightlossasshownbelow.

12

AnswerKey
Testname:6500_MONOPOLY_LONG_PROBLEMS

33)

LetP C=Callowayprice
PA=Archwoodprice
EC=Callowayelasticity
EA=Archwoodelasticity
a.
Foranoptimalpricerationthefollowingconditionsmusthold.
1
1+
EA
PC
must=
1
PA
1+
EC
PC
PA

must=

1+
1+

1
EA
1
EC

42
=1.68
25
1+

=
1+

1
-4
1
-2

3
4

3
= =1.5
2
1
2

Thecurrentpriceisnotoptimal.
b.
Iftheelasticitiesareconstant

PC
PA

shouldequal1.5.

PA=$25,PCshouldbe$37.50
34) TodetermineoptimalpricesMRA=MRB= MC.(ThisisacceptablebecauseMCisconstant.)
SettingMRB=MC
70-0.001QB=10
-0.001Q B=-60
QB=60,000
PB=70-0.0005(60,000)=$40
settingMRP=MC
20-0.0004Q P=10
-0.0004QP=-10
QP=25,000
PP=20-0.0002(25,000)=$15
PB=$40;PP=$15.Thereforethepricesarenotoptimal.
35) a.
OptimalpricediscriminationrequiresthezootosetMRA=MRCS=MC.
SettingMRA=0
9.6-0.16QA=0
9.6=0.16QA
QA=60
13

AnswerKey
Testname:6500_MONOPOLY_LONG_PROBLEMS

PA=9.6-0.08(60)
PA=$4.8
MRCS=4-0.10QCS=0
4=0.10QCS
QCS=40

PCS=4-0.05(40)=$2
PCS=$2
TRA=PAQA
TRA=4.860=$288
TRCS=PCSQCS
TRCS=240=$80
TR=288+80=$368

b.
Tocalculateelasticities,solveforQ.
PA=9.6-0.08QA
PA-9.6=-0.08QA
QA=120-12.50PA
QA=120-12.5PA
QA PA
EA=

PA QA
EA=-12.50
EA=

4.8
60

-60
=-1.0
60

PCS=4-0.05QCS
PCS=4-0.05QCS
PCS-4=-0.05QCS
QCS=80-20PCS
2
ECS=-20
40
ECS=-1
Yesitisconsistent.WhenMC-0,profitmaximizationrequiresthatMR=0.
36) a.
Asasimplemonopolist,thefirmwouldsetMR=MC
45-0.05Q=30
-0.05Q=-15
Q=300
P=45-0.025(300)
P=45-7.5
P=37.50
14

AnswerKey
Testname:6500_MONOPOLY_LONG_PROBLEMS

TR=37.50300=$11,250
b.
Underatwo-parttariffwithidenticalconsumers,priceandoutputaredeterminedwhereP =MC.
45-0.025Q=30
-0.025Q=-15
Q=600
P=45-0.025(600)
P=30

Tofindaccesscharge,mustfindtheconsumersurpluswhichisareaA.
AreaA=CS=(0.5)(15)(600)=4,500
Setaccesschargeof$4,500anda$30hourlyfee.
Totalrevenueunderthisoptionistheareaunderdemandcurveor$22,500.Totalrevenuedoubleswithatwo -part
tariffascomparedwiththesinglehourlyrentalchargeoption.
c.
Withdifferingdemands,thefirmshouldsetpricesslightlyaboveMC.Theaccesschargeshouldthenbesettocapture
allconsumersurplusfromthebuyerwiththesmallestdemand.
37) SinceLACisconstant,LMCisalsoconstantandequaltoLAC.LMC = $1.50
a.
UnderperfectcompetitionP=LMC.WebeginbysolvingPasafunctionofQ:
Q=1800-200P
Q-1800=-200P
P=9-0.005Q
UndercompetitionP=LMC
9-0.005Q=1.5
-0.005Q=-7.5
Q=1500
15

AnswerKey
Testname:6500_MONOPOLY_LONG_PROBLEMS

P=9-0.005(1500)
P=9-7.5=$1.50
P=LMC=LACsothatp(producersurplus)=0
Consumersurplusistheareaunderthedemandcurveabovemarketprice,asindicatedinthefigure.

b.
UndermonopolyMR=MC
P=9-0.005Q
MR=0-0.01Q
SettingMR=MC
9-0.01Q=1.5
-0.01Q=-7.5
Q=750
P=9-0.005(750)
P=9-3.75
P=5.25

16

AnswerKey
Testname:6500_MONOPOLY_LONG_PROBLEMS

= P-LAC Q
=(5.25-1.50)750
=2812.50
Tofindconsumersurplus,findareaofthetriangleunderthedemandcurveandaboveprice.
CS=9-5.25)(750)(0.5)=1,406.25.
Thesumofconsumersurplusandproducersurplusis1,406.25+2,812.50=4,218.75.
c.
Underfirst-degreepricediscrimination-outputisatthepointwherethedemandcurvecutstheLMCcurve.

Thefirmchargestheentireareaunderthedemandcurve.
PS=(9-1.5)(1,500)(0.5)=5,625.
ComparisonofEfficiency
a. Competition
Consumer+ProducerSurplus=5,625
17

AnswerKey
Testname:6500_MONOPOLY_LONG_PROBLEMS

b.

Monopoly
Consumer+ProducerSurplus=4,218.75
c. FirstDegree
Consumer+ProducerSurplus=5,625
Monopolyresultsinadeadweightloss.First-degreepricediscrimination
resultsinaredistributionofincome,butdoesnotresultinadeadweight
loss.

18