4. Consider the following situation for Firm A: Firm A is a monopolist and has M

Question

4. Consider the following situation for Firm A: Firm A is a monopolist and has MC=30. Demand for Firm A’s product is given by P = 50 - Q.

a) If the monopolist does not price discriminate what is the profit maximizing quantity and price?

Now suppose that firm A uses membership fee based price discrimination (sometimes called two part tariff pricing).

b) Calculate the profit maximizing price for each unit of the product with membership fee pricing.

c) Calculate the profit maximizing quantity the firm will sell with membership fee pricing.

d) Calculate the profit maximizing membership fee.

e) By how much will the firm increase profits with membership fee price discrimination versus non-price discrimination?

Explanation / Answer

A)The profit maximising equilibrium condition of monopolistic market is MC=P

so for the above problem 50-Q=30 which implies Q=20 and P=30 which is the profit maximising quantity and price.

B)In case of two part tariff priceing the profit maximising equilibrium condition is MC=MR1=MR2 where

MR=P(1-1/e)where e denotes the elasticity.So Profit maximising Q is totally depends upon P1 and P2 here P1 and P2 is not given so conclusion can't be done.

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