MC- AC P2 MR D-AR Qi Consider the firm with market power shown in the diagram ab
ID: 1132507 • Letter: M
Question
MC- AC P2 MR D-AR Qi Consider the firm with market power shown in the diagram above. The value of PO is equal to $36.0, the value of P2 is equal to $6.2, and the value of Q1 is equal to 82.2. The profit maximising price for the firm with market power pricing at a single price is P1, which is exactly halfway between PO and P2. You can calculate P1 by adding up PO and P2, and then dividing that number by two [i.e. P1 (PO P2)/2]. Q2 is exactly twice as big as Q1. You can calculate Q2 by multiplying Q1 by two [i.e. Q2 -Q1x2] If this firm decided to move to two-part pricing, and wanted to maximise its profits with that pricing strategy, what would be the size of the resulting profit (or producer surplus)? [Make sure to record your answer to at least two decimal places] Answer:Explanation / Answer
Ans. This question is quite interesting. Let's start solving it.
The firm is maximizing it's profit when when Price = P1 ( $36 + $6.2/2) = $21.1 and Q1 = 82.2 . Now before moving to 2 part strategy let us know a little bit about it. This strategy is usually used by monopoly firm and in this case , firm charges a fixed amount of price regularly along with a variable price.
Note - Please keep a constant eye on diagram to understand the explanation properly.
At Point B . Profit of the firm is = (P1-P2) × Q1 = ($21.1-$6.2) × 82.2 = 1224.78
The consumer surplus along the profit maximization is still uncaptured. ie AP1B Firm will try to capture this too.
So additional profit at point A = (P0- P1) × 1/2(Q1) = (36 - 21.1) × 41.2 = $613.88
Same goes with the Surplus of BCD.
Hence the firm would try to take all the profit as a fixed charge and then set P2 ( Marginal Cost v) as the variable price. This will help the firm to get their Initial Profit along with 2 additional surplus.
Let's Calculate. Total Profit = ADP2
29.8 × 1/2 × 164.4 = $ 2449.56 .
Hence after changing to Two Price Policy . Profit Maximization is $2449.56
I hope you understood this answer. Do ask in case of any doubts.
Best of Luck ! Keep Chegging !
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