Question

In: Economics

In the short term, a MONOPOLY is capable of differentiating, for the same market, two different...

In the short term, a MONOPOLY is capable of differentiating, for the same market, two different demand behaviors: (6)

 Q1 = 24 - 0.20P1
 Q2 = 10 - 0.05P2

If the company faces a cost function CTC = 35 + 40Q

i. What price will the company charge if it applies price discrimination? It shows, for each of the previous situations, that the price established by the MONOPOLY allows you to MAXIMIZE PROFITS

ii. Calculate the value of TOTAL BENEFIT

Solutions

Expert Solution

Price Discrimination
Q1 = 24-0.20P1                Q2= 10-0.05P2
P1 = 120-5Q1                     P2 = 200-20Q2

Given CTC = 35+40Q, thus MC = $40

i) With price discrimination (P1 is not equal to P2)
P1 = 120-5Q1                    
MR1= 120-10Q1
For profit maximization MR1 = MC
120-10 Q1 = 40
   required Q1= 8 thus the optimum level of production for market 1 is 8 unit
required P1 = (120-(5*8)) = $80

P2 = 200-20 Q2
MR2= 200-40 Q2
For profit maximization MR2 = MC
200-40 Q2=40
required Q2= 4 thus the optimum level of production for market 2 is 4 unit
required P2= (200-(20*4))= $120

ii) total quantity = Q1 + Q2 = 8+4= 12 units

So profit with price discrimination = TR1 + TR2 – TC
     = (80*8) + (120*4) – {35+(40*12)} =$ 605

Hence, total benefit with price discrimination is $605


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