2. Suppose that a monopolist’s product could be either high quality (H) or low q

Question

2. Suppose that a monopolist’s product could be either high quality (H) or low quality (L). There are 10 identical consumers, each of whom values a low-quality product at vL and a high-quality product at vH = 8/5vL . (So if consumers believe that a good is of quality i , then the monopolist can sell 10 units at any price p vi .) The cost of producing q units of a good of quality i is 1/10ciq2.
If vH/cH = vL/cL = 25/16, how much would a high-quality producer have to restrict his
supply to convince consumers that his product was actually of quality H? [Hint: Quantity for a
high-quality firm must be sufficiently small that a low-quality producer would prefer to sell all
10 units and openly reveal them as low quality, rather than disguising these goods as high-quality
items.]

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