Suppose a folding chair monopoly can produce any level of output it wishes at a

Question

Suppose a folding chair monopoly can produce any level of output it wishes at a constant marginal (and average) cost of $5 per unit. Assume that the monopoly sells its chairs in two different markets that are separated by a large distance consequently, arbitrage is impractical. The demand curve in the first market is given by x_1= 55 - p_1. The second demand is given by x_2 = 70 - 2p_2. If the monopolist can effectively separate the two markets, what level of output should be produced in each market and what price will prevail in each market? What are total profits for the monopolist? If the monopolist is unable to separate the two markets then it must charge one price to all the consumers in both markets. What is that price, and what are the monopoly's profits?

Explanation / Answer

(a) For two different markets, we need to find out the efficient point for the two markets.

So for market 1: MC = MR

MC = 5

To calculate MR, we need AR = P. SO P1 = 55 - x1

MR1 = 55 - 2x1

MC = MR1

5 = 55 - 2x1

2x1 = 50 and x1 = 25 and P1 = 55 - (25) = 30

..............................

Market 2

MC = 5

To calculate MR, we need AR = P. SO P2 = 35 - 0.5 x2

MR2 = 35 - x2

MC = MR2

5 = 35 - x2

x2 = 30 and P2 = 35 - (0.5*30) = 20

Total Profit = TR - TC

Total Profit = (25*30) + (30*20) - (55*5) = 1075

(b) X = x1 + x2

X = 55 - P +70 - 2P

X = 125 - 3P

or 3P = 125 - X

P = 25 - 0.33X

MR = 25 - 0.66X

MC = 5

MC =MR

5 = 25 - 0.66X

0.66X = 25 - 5 = 20

X = 20/0.66 = 30.30

P = 25 - 0.33X = 15

Profit = (15*30.30) - (5*30.30) = 303

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