Consider a monopoly that sells a good to two different consumer groups. Group 1

Question

Consider a monopoly that sells a good to two different consumer groups. Group 1 consumers have individual demand given by q1 = 2p1. Group 2 consumers have individual demand given by q2 = 4 p2. There are N1 = 20 consumers in group 1 and N2 = 30 consumers. Suppose that once sold to a consumer, the product cannot be resold. The unit cost of production is MC = 1.

Suppose that the monopoly is able to price discriminate. Compute the price chosen by the monopoly for each group of consumers. Compute the monopolist profit and the consumer surplus.

Explanation / Answer

The monopoly sells a good to two different consumer groups. Group 1 consumers have individual demand given by q1 = 2p1 or p1 = 2 - q1. MR for this group is MR1 = 2 - 2q1.

Group 2 consumers have individual demand given by q2 = 4 p2. So MR2 = 4 - 2q2

There are N1 = 20 consumers in group 1 and N2 = 30 consumers. The unit cost of production is MC = 1. Monopolist will use MR = MC rule for two markets

2 - 2q1 = 1 4 - 2q2 = 1

q1 = 0.5 q2 = 1.5

p1 = 1.5 p2 = 2.5

Profit = 0.5*1.5*20 + 1.5*2.5*30 - 50*1

= 77.50

Consumer surplus for group 1 = 0.5*(2 - 1.5)*0.5 = 0.125*20 = 2.5 and for group 2 = 0.5*(4 - 2.5)*1.5 = 1.125*30 = 33.75 for all consumers.

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.