Midterm2prac1

# P mc 2 and q 1 28 the membership fee is then set

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Two part tariff requires the monopolist to charge a price that is equal to its MC. P = MC = 2 and Q 1 = 28. The membership fee is then set equal to the resulting consumer surplus F = CS = 392. Now supposes that firm A is allowed to expand its market to also serve market 2 with a demand function as: P 2 = 40 2Q 2 . d) If firm A can completely separate the two markets, what are the monopoly prices charged and quantity served in each market (price discrimination across markets but not within a market) (7 marks) MR 1 = MR 2 = MC = 2 Q 1 =14 and P 1 = 16

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Q 2 =9.5 and P 2 = 21 Question 2-2 (32 marks) Consider a market that has the following demand function: P = 30 Q. Firm A is licensed by the government to be the only firm to serve this market. Suppose that firm A has a total cost function that takes the following form: TC A = 5 +2Q A . a) What is firm A’s fixed cost, variable cost and marginal cost? (9 marks) FC = 5 VC = 2Q A MC = 2 b) If firm A cannot price discriminate, compute its monopoly price, quantity and profit? (9 marks) Profit max. implies that MR = MC MR A = 30 - 2Q A = 2 => Q A = 14 P A = 16 Profit = 191 Suppose now that the government allow firm B, whose total cost function is TC B = 5 + Q B , to also serve market 1.
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• Fall '12
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