Suppose a market is served by a monopoly manufacturer selling to a single customer. The customer’s...

Suppose a market is served by a monopoly manufacturer selling to a single customer. The customer’s inverse demand is given by P = 50 − (1/10)Q. The monopoly’s marginal cost is constant at 20, and there are no fixed costs. Show your work for each question below.

(a) If the monopoly can only charge a single price, what price does it charge? What are its profits?

(b) Now suppose the monopoly can use a two-part tariff. Find the values of the fixed fee, f, and price per unit, p, that maximize its profits.

(c) Next, suppose a customer joins the market who is willing to pay $80 per unit for up to 90 units (i.e., demand is perfectly elastic at $80 up to a quantity of 90). If the monopoly charges the f and p you found in (b), what are its profits now?

(d) Suppose the monopolist continues to use a single two-part tariff when selling to both customers. Provide an example of a fixed fee, f 0 , and price per unit, p 0 , that bring the monopolist higher profits than in (c). Proceed carefully and explain in words why the change helps to increase profits,

Expert Solution

Rahul Sunny answered 6 months ago

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