In: Economics
1.Suppose the commodity demand functions in two separate markets are as follows:
Q1=500-3P1 and Q2=500-2P2
and a monopoly can cater to these markets at a constant marginal cost of $2.
a. Calculate the profit-maximizing quantities of output supplied to the two markets, their prices and the total profits reaped by the monopoly
b. Calculate the deadweight losses associated with this practice of third degree price discrimination;
c. Suppose the monopoly now resorts to a single-pricing policy. What would then be the profit-maximizing quantity of output, price, profits and the deadweight loss?
d. In the presence of adverse selection in the insurance market, the resulting equilibria (if they exist) may be inefficient. Explain.
Part a)
Part b)
DWL1 =10064.97 AND DWL2= 15376
Part c)
Part d) In case of adverse selection that results in an inefficient outcome. This is because the insurance company is unaware of the kind of customer that is the one Bad type (the one who keeps secret of their health issues in case of health insurance is purchased the necessary information that could impact the premium charged by the insurance company.) and the other is a good type (who do not keep secret regarding their health). Then in such a case, the premium is charged from both different kind of customer is not the same. But, the company is unaware of the customer's type. Therefore, it charges the average premium, which is higher than the good type of willingness to pay. Thus, the good type does not participate and only bad type customers participate in the market which is the case of inefficient equilibria.