1. Two markets exist for Haggen Daz ice cream.

The demand functions are as

follows:
Q1 = 12 - P1
Q2 = 8 - P2

The firm's cost function is given as:

TC = 5 + 2Q
In order to maximize profits, how many ice creams should be sold in Market 1
and how many should be sold in market 2 and at what price in each market? Do
you think it is better to have one price in the two markets? Give reasons for
your answer. (Max Marks : 5)

Answer :

P1 = 12 Q1
P2 = 8 - Q2

Profit = TR1 + TR2 - TC

TR1 = P1 X Q 1
= 12 Q1 Q12

TR2 = P2 X Q2
= 8 Q 2 Q 22

= (12 Q1 Q12) + (8 Q2 Q22) - (5 + 2(Q1 + Q2))

Differentiating both sides by Q1 and Q2 respectively -
d/dQ1 = 10 - 2 Q1 = 0
Q1 = 5
d/dQ2 = 6 - 2 Q2 = 0
Q2 = 3

d2/dQ12 = -2 (Maxima)
d2/dQ22 = -2 (Maxima)
P1 = 12 Q1 = 7
P 2 = 8 - Q2 = 5
Thus, selling 7 and 5 quantities in Markets 1 and 2 respectively, would maximise profits.
Max Profit = 35 + 15 21 = 29

Lets assume the ice cream is sold at a single price of 6,

P1 = 6 Q1 = 6
P2 = 6 Q2 = 2
TC = 5 + 2 (Q1+2)
= 21
Profit = 36 + 12 21
= 27

Because 27 < 29, the profit in this case is less than the one discussed above.

Fixing a higher single price will dissuade some buyers who do not value the ice cream at
such high prices. Thus, total quantity sold will reduce.
Fixing a lower single price will allow many buyers to consume the good but will lead to
lower profits because of the lower price.
2. A monopolist is deciding how to allocate output between two
geographically separated markets (East Coast and Midwest). Demand and
marginal revenue for the two markets are:
P1 = 15 - Q1 MR1 = 15 - 2Q1
P2 = 25 - 2Q2 MR2 = 25 - 4Q2.
The monopolist's total cost is C = 5 + 3(Q1 + Q2 ). What are price, output,
profits, marginal revenues, if the monopolist can price discriminate ? (Max
Marks: 5)

P1 = 15 - Q1
MR1 = 15 - 2Q1

P2 = 25 - 2Q2
MR2 = 25 - 4Q2

TC = 5 + 3(Q1 + Q2 )

Profit = TR1 + TR2 - TC

TR1 = P1 X Q1 = 15 Q1 Q12
TR2 = P2 X Q2 = 25 Q2 2 Q22
= (15 Q1 Q12) + (25 Q2 2Q22) - (5 + 3(Q1 + Q2))
= 12 Q1 Q12 + 22 Q2 2Q22 5

Differentiating both sides -

d/dQ1 = 12 - 2 Q1 = 0
Q1 = 6
d/dQ2 = 22 - 4 Q2 = 0
Q2 = 5.5

d2/dQ12 = -2 (Maxima)
d2/dQ22 = -4 (Maxima)
P1 = 15 Q1 = 9
P2 = 25 - 2Q2 = 14

Max Profit = 54 + 77 39.5 = 91.5

Marginal Revenue
MR1 = 15 - 2Q1 = 3
MR2 = 25 - 4Q2 = 3