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Problem Set 5

The document contains 5 problem sets related to monopoly pricing. Problem set 1 asks about profit maximization for a monopolist with a linear demand curve. Problem set 2 examines a monopolist with two plants and different marginal costs. Problem set 3 compares producer surplus under monopoly and perfect price discrimination. Problem set 4 analyzes uniform and block pricing for a software monopolist. Problem set 5 models demand for rides at an amusement park and calculates profit-maximizing and aggregate surplus-maximizing prices.

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Akshit Gaur
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42 views2 pages

Problem Set 5

The document contains 5 problem sets related to monopoly pricing. Problem set 1 asks about profit maximization for a monopolist with a linear demand curve. Problem set 2 examines a monopolist with two plants and different marginal costs. Problem set 3 compares producer surplus under monopoly and perfect price discrimination. Problem set 4 analyzes uniform and block pricing for a software monopolist. Problem set 5 models demand for rides at an amusement park and calculates profit-maximizing and aggregate surplus-maximizing prices.

Uploaded by

Akshit Gaur
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

P ROBLEM SET 5

1. Suppose a monopolist faces a linear market demand curve P = a − bQ and has a constant
marginal cost M C = c and no fixed costs.

(a) What is the monopolist’s profit-maximizing quantity and price?

(b) What is the aggregate surplus at the monopolist’s profit maximizing quantity?

(c) What is the quantity that will maximize the aggregate surplus?

2. Suppose a monopolist faces a demand curve given by P = 120 − 3Q. The monopolist has
two plants. The first has a marginal cost curve given by M C1 = 10, and the second plant’s
marginal cost curve is given by M C2 = 60. The monopolist also does not have any fixed
costs.

(a) Find the monopolist’s optimal total quantity and price.

(b) Find the optimal division of the monopolist’s quantity between its two plants.

3. Suppose a monopolist has a constant marginal cost M C = 2 and faces the demand curve
P = 20 − Q. There are no fixed costs.

(a) Suppose price discrimination is not allowed (or is not possible). How large will the
producer surplus be?

(b) Suppose the firm can engage in perfect first-degree price discrimination. How large
will the producer surplus be?

4. Softco is a software company that sells a patented computer program to businesses. Each
business it serves has the demand for Softco’s product: P = 70 − 0.5Q. The marginal cost
for each program is $10. Assume there are no fixed costs.

(a) If Softco sells its program at a uniform price, what price would maximize profit? How
many units would it sell to each business customer? How much profit would it earn
from each business customer?

1
(b) Softco would like to know if it is possible to improve its profit by implementing block
pricing. Suppose that Softco were to sell the first block at the price you determined in
(a), and that the quantity for that block is the quantity you determined in (a). Find the
profit-maximizing quantity and price per unit for the second block. How much extra
profit would Softco earn from each of its business customers?

5. Col. Tom Barker is about to open his newest amusement park, Elvis World. Elvis World
features a number of exciting attractions: you can ride the rapids in the Blue Suede Chutes,
climb the Jailhouse Rock and eat dinner in the Heartburn Hotel. Col. Tom figures that
Elvis World will attract 1,000 people per day, and each person will take x = 50 − 50p rides,
where p is the price of a ride. Everyone who visits Elvis World is pretty much the same and
negative rides are not allowed. The marginal cost of a ride is essentially zero.

(a) If Col. Tom sets the price to maximize profit, how many rides will be taken per day by
a typical visitor?

(b) What will the price of a ride be?

(c) What will Col. Tom’s profits be per person?

(d) What is the aggregate surplus maximizing price of a ride? If Col. Tom charged this
price for a ride, how many rides would be purchased?

(e) How much consumers’ surplus would be generated at this price and quantity?

(f) If Col. Tom decided to use a two-part tariff, what admission fee and price per ride
should he charge?

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