Question

A monopolist faces a demand curve of the form: P = 610 – 0.01Q. The total cost for this monopolist is TC = 2,000,000 + 10Q. Assume there are no externalities of production or consumption of this monopolist’s product.

a) Suppose this monopolist cannot price discriminate. Explain why this monopolist will not produce an output greater than 30,000 units.    

b) Draw a diagram to illustrate this monopolist’s situation. Show the demand, marginal revenue and marginal cost curves, and the profit maximizing price and quantity from part (a).  

c) Suppose now the monopolist discovers it can price discriminate. It wants to sell three batches of output at prices consistent with its demand curve: the first 10,000 units it will sell at the highest price, the second 10,000 units at a lower price, and the third 10,000 units at a price lower still. Show this on your diagram, and calculate how much profit the monopolist will make under this price discrimination scheme.  

d) Suppose the government tried to regulate this monopolist to produce the socially efficient quantity of output. The government promises to subsidise any loss made by the monopolist in achieving the socially efficient quantity. Explain why this subsidy will be equal to $2,000,000

Answer 1