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1. Consider a monopolist where the market demand for the good is given by the equation

P = 1000 Q and the total cost function for the monopolist is given by

TC = 1000 + 100Q + (1/2)Q 2 and the monopolists MC curve is given by the equation

MC = 100 + Q.

a) What is the fixed cost of production for this monopolist?

b) Suppose this firm acts as a single price monopolist where it produces the profit-

maximizing level of output based upon its being able to charge a single price for

its product. Given that the firm is a single-price monopolist, find the firms

equilibrium output, equilibrium price, and level of profits.

c) Given that the firm is a single-price monopolist, find the value of consumer

surplus (CS), producer surplus (PS), and deadweight loss (DWL) for the

monopolist.

d) Now, lets consider the same monopolist who decides to engage in second degree

price discrimination. Suppose this monopolist will continue to produce the profit

maximizing quantity and charge the profit maximizing price that they selected as

a single price monopolist, but will, in addition, produce an additional 100 units of

the good and sell these 100 units for a price of $600 per unit. Find the firms level

of profits, CS, PS, and DWL if they practice second degree price discrimination

as described in the above information.

e) Now, suppose this monopolist is able to practice first degree price discrimination

so that the monopolist charges each consumer the maximum price that consumer

is willing to pay. If this monopolist practices first degree price discrimination (that

is, perfect price discrimination) its demand curve is also the firms MR curve.

Explain why this is true.

f) Given this firm practices first degree price discrimination, calculate the value of

the firms profit, CS, PS and DWL.

g) Fill in the table below with your findings from this problem (this will make it

easier to compare the costs and benefits of price discrimination).

Monopolist Discrimination Perfect Price Discrimination

Profit

CS

PS

DWL

h) From a profit maximizing perspective, which of the three options in this question

is best for the monopolist? Explain your answer.

i) From a consumers perspective is there anything beneficial about perfect price

discrimination? Explain your answer.

2. If two spiders find a dead insect at the same time, each spider will make menacing

gestures to scare off the other. If one spider backs down, that spider gets nothing and the

other spider gets the insect to itself. If both spiders back down, they can share the insect.

If neither backs down, the spiders will fight. The payoffs resulting from the fight depend

on the sizes of the spiders and are described below.

Spider 2

5,5 0,10

Spider 1 Back down

a) Suppose the spiders are the same size so that x=y. For what values of x, will each spider

have a dominant strategy? What is the dominant strategy? (Show your work)

b) Again, suppose the spiders are the same size. For what values of x, will this game be a

Prisoners' Dilemma? (Show your work)

c) Suppose when spider 1 is smaller than spider 2 that x < 0 < y. Show that this game does

not have a dominant strategy equilibrium but that it can be solved using IEDS.

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