P1 = 80-5q1

P2 = 180-20q2

The firm’s total cost curve is

C(Q) = 50+20Q,

Where Q = q1+q2

a. Suppose the firm is able to practice third degree price discrimination. Derive its profit maximizing price and output in each market.

b. Derive the price elasticity of demand at equilibrium in each market. Does the relationship between the relative prices and the relative elasticities in markets 1 and 2 make sense? Explain?

c. Suppose the firm is unable to priced discriminate. Indicate its profit maximizing price and output level. Is output higher or lower/lower/same in this case vs. the case in part (a)?

d. Derive and compare total economic welfare between your solutions in parts (a) and (c). Do your results make sense, given your result from part (c) for the effect of price discrimination on output? Explain.

e. What is the socially optimal price and level of output in this market? Is the firm producing at this point viable? Explain.

f. What is the lower price that a regulator could set that is consistent with the viability of the firm, assuming it must serve the entire market demand at that price? Does this price generate a deadweight loss? If so what is it?

g. Discuss possible solutions to the conundrum that parts (e) and (f) appear to illustrate for the regulation of monopoly?

h. Return finally to the unregulated monopolist. Assume this industry is one where the firm can “meter” customers so as to charge them an “entry” fee for the right to consume the product. Examples are membership fees. Explain how this firm can combine an entry fee with a per-unit price to both capture the consumer’s entire surplus and eliminate and deadweight loss. What levels of fees and prices will the monopolist set to accomplish this goal?

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