This preview shows pages 1–3. Sign up to view the full content.
ECON 2296

Practice Questions Chapter 11
1. A monopoly faces market demand of Q = 450  4P and has total costs of
TC = Q
2
+ 500.
a) Calculate the monopoly’s output, price and profits.
b) Suppose the monopoly used firstdegree price discrimination. Calculate the
monopoly's marginal revenue, output and profit.
2. A monopoly serves two markets:
residential and commercial. The demand of
residential consumers is Q
R
= 125  5P
R
and the demand of commercial consumers is
Q
C
= 400  20P
C
. The firm's total cost is TC = 3Q
2
/50 where Q = Q
R
+ Q
C
.
a) What is the total market demand for the monopoly's product?
b) If the monopoly charged a single price what price would maximize profit?
Hint: find marginal revenue. What would the monopoly's profit be?
c) Which individual market segment is willing to pay higher prices? Would it
be more profitable for the firm to sell only to this segment of the market?
3. Suppose the firm in Question 2 separated the two markets and used thirddegree price
discrimination.
a) What is the marginal revenue of the residential market?
b) What is the marginal revenue of the commercial market?
c) What price would the firm charge each market under price discrimination?
d) Calculate the monopoly's profit. Is profit higher than selling at a single price?
e) What is the price elasticity of demand in the residential market? In the commercial
market? In which market is demand less elastic? In which market is the price
higher?
4. A monopoly's sells its product to consumers with identical individual demands:
Q = 100  P. The firm's total cost is C = 10Q.
a) If the monopoly charged the same price on each unit, what price would
maximize profit?
b) What would the monopoly's profit be from each consumer?
c) Suppose the monopoly used seconddegree price discrimination by charging $80
per unit for the first 20 units (ie an initial block of 20 units) and $40 per unit for
any units above 20 units. Calculate the monopoly's profit from each consumer?
d) Suppose instead that the monopoly charged $100 per unit for the initial block of
5 units and $10 per unit for the units above 5 units. Would the monopoly's
customers buy any of the product? Explain. If the monopoly set a larger
initial block at $100 per unit, would its customers still buy the product? Explain.
e) What is the largest initial block that the monopoly could set and its customers
would still buy the product (at a price of $100 per unit for the initial block and
$10 per unit for units above the initial block).
f) What would the monopoly's profits be in e)?
5. A monopoly uses twopart tariffs to sell its product to consumers with identical
individual demands: Q = 50  5P. The firm's total cost is C = 2Q.
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Documenta) What price would the monopolist charge to maximize profit? What
membership fee would the monopolist charge to maximize profit?.
This is the end of the preview. Sign up
to
access the rest of the document.
 Fall '10
 W.GrayGiovannetti
 Economics, Monopoly, Price Discrimination

Click to edit the document details