REMEDIAL CLASS - 2

Q1. A producer has the possibility of discriminating between the domestic and foreign markets
for a product where the demands, respectively, are
Q1 = 21 0.1P1, Q2 = 50 0.4P2
TC = 2000 + 10Q, where Q = Q1+Q2
a. What price will the producer charge in order to maximize profits with discrimination
between markets, and without discrimination?
b. Compare the profit differential between discrimination and non discrimination.

Q2. The demand function for price increases and for price decreases for an oligopolist are:
Q1 = 210 30P1
Q2 = 90 10P2
The oligopolists total cost function is: TC = 3.5Q + Q2/60.
a. Determine the price and output at the kink on the demand curve.
b. Determine lower and upper limits of the MR gap and prove that MC falls in the MR gap.
c. Find the value of the total profit.

Q3. Suppose that a typical monopolistically-competitive firm faces the following demand and
total cost equations for its product:
Q = 20 (5/3) P
TC = 216 20Q + Q2
where P is the price of the product and Q is the number of units produced.
a. What is the firms profit-maximizing price and output level?
b. What is the relationship between P and ATC at the profit maximizing output level.
c. Is this firm earning an economic profit? Is this firm in short-run or long-run
monopolistically competitive equilibrium? Will new firms enter into or exit from this
industry?

Q4. Consider the monopolist that faces the following market demand and total cost function:
Q = 22 P/5
TC = 100 10Q + Q2
a. Find the profit-maximizing price (Pm) and output (Qm) for this firm. At this price
quantity combination, how much is consumer surplus?
b. Calculate monopolys economic profit?
c. Suppose that government regulators required the monopolist to set the selling price at
the long-run, perfectly competitive rate. At this price, what is consumer surplus?
d. Relative to the perfectly competitive long-run equilibrium price, what is the deadweight
loss to society at Pm?
 Solutions
Q1.
a) To maximize profits under price discrimination, the producer will set prices so that MC = MR in each
market. Thus, MC = MR1 = MR2.
With TC = 2,000 + 10Q
MC = dTC / dQ = 10
Hence MC will be the same at all levels of output.
In domestic market,
Q1 = 21 0.1P1
Hence, P1 = 210 10Q1
Therefore, TR1 = (210 10Q1)Q1
= 210Q1 10Q12
and MR1 = dTR1/dQ1 = 210 20Q1.
When MR1 = MC,
210 20Q1 = 10,
Q1 = 10.
P1 = 210 10(10) = 110

In the foreign market,

Q2 = 50 0.4P2
Hence, P2 = 125 2.5Q2
TR2 = (125 2.5Q2)Q2
= 125Q2 2.5Q22
Thus MR2 = dTR2/dQ2 = 125 5Q2
When MR2 = MC,
125 5Q2 = 10, Q2 = 23
Hence, P2 = 125 2.5(23) = 67.5
The discriminating producer charges a lower price in the foreign market where the demand is relatively
more elastic and a higher price (P1 = 110) in the domestic market where the demand is relatively less
elastic.
b) If the producer does not discriminate, P1 = P2 and the two demand functions may simply be
aggregated. Thus,
Q = Q1 + Q2 = 21 0.1P + 50 0.4P
= 71 0.5P
Hence, P = 142 2Q
TR = (142 2Q)Q
= 142Q 2Q2
 and MR = dTR/dQ = 142 4Q
When, MR = MC,
142 4Q = 10, or, Q = 33
P = 142 2(33) = 76
When no discrimination takes place, the price falls somewhere between the relatively high price of the
domestic market and the relatively low price of the foreign market. Notice, however, that the quantity
sold remains the same at P = 76, Q1 = 13.4, Q2 = 19.6 and Q = 33.
c) With discrimination,
TR = TR1 + TR2 = P1Q1 + P2Q2
= 110 + 67.5(23) = 2652.50
TC = 2000 + 10Q, where Q = Q1 + Q2
TC = 2000 + 10(10 + 23) = 2330
Thus,
Profit = TR TC = 2652.50 2330 = 322.50
Without discrimination,
TR = PQ = 76(3) = 2508
TC = 2330, since costs dont change with or without discrimination.
Thus, Profit = 2508 2330 = 178.
Profits are higher with discrimination than without discrimination.

Q2.
Q3.

Q4.
Solved in Tut 15, Q1