Mr. White is a monopolist who, through a combination of good products, friendly
ID: 1169105 • Letter: M
Question
Mr. White is a monopolist who, through a combination of good products, friendly service, and occasional acts of grisly violence, maintains effective barriers to entry. He has two types of customers (pink customers and orange customers), which he can easily identify. They have the following demand schedules (pay close attention to the changes in quantity at each price). Assume these prices and quantities represent t all the choices the consumers have (for example, don’t try to extrapolate quantities demanded at a price of $5.50). Hint: remember that marginal revenue is the change in total revenue divided by the change in quantity.
Price
Quantity (pink)
Quantity (orange)
8
0
10
7
4
12
6
8
14
5
12
16
4
16
18
3
20
20
If Mr. White has constant marginal costs of $4 and sunk fixed costs of $10, what will be his profit if he price discriminates? (2 points)
The government decides that Mr. White should not be allowed to price discriminate and effectively prevents him from doing so. What would be his output level, price and profits if he cannot price discriminate? (2 points)
Price
Quantity (pink)
Quantity (orange)
8
0
10
7
4
12
6
8
14
5
12
16
4
16
18
3
20
20
Explanation / Answer
The price for pink consumers will be $6 as it will result in the maximum profit of $6, and the price for the orange consumers will be $8.
Total Revenue at price of $6 for pink consumers = 6 x 8 = $48
Total cost at price of $6 for pink consumers = 4 x 8 + 10 = $42
Profit at price of $6 for pink consumers = 48 – 42 = $6
Total Revenue at price of $8 for orange consumers = 8 x 10 = $80
Total cost at price of $8 for orange consumers = 4 x 10 + 10 = $50
Profit at price of $8 for orange consumers = 80 – 50 = $30
From the table below we can see that the single price that gives the highest profit is $7.
Price Pink Orange Total demand Marginal Cost Fixed Cost Total Cost Total Revenue Profit 8 0 10 10 40 10 50 80 30 7 4 12 16 64 10 74 112 38 6 8 14 22 88 10 98 132 34 5 12 16 28 112 10 122 140 18 4 16 18 34 136 10 146 136 -10 3 20 20 40 160 10 170 120 -50Related Questions
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