Monopoly Problem Set

1. A monopolist producing with a constant average cost and marginal cost of $6 has the following
demand for its product.

Price Quantity
$10 1
$9 2
$8 3
$7 4
$6 5

a. Calculate total and marginal revenue for each output level.

b. Find the optimal output and price.
c. Determine the profit or loss as this output.
2. Suppose Cattcom is a monopolist in providing communication services. The marker demand curve is
P = 100 – Q, its total costs are TC = Q2/2 + 10Q, and its marginal cost is given by: MC = 10 + Q.
a. What is the profit maximizing price and the quantity?
b. What would be its profits if government imposed a regulation to set P=MC? Or P=AC?
c. Suppose that the government imposes a tax, so the MC = 20 + Q. What is the profit maximizing
price and the quantity?
3. The following graph shows the demand, marginal revenue, and marginal cost curves in a monopoly
market.
a. Identify the profit-maximizing price and quantity for this monopolist.
b. What is the value of the consumer surplus, producer surplus, and deadweight loss in the market?
c. How would consumer surplus change if this market was competitive?
4. First Degree Price Discrimination
Tobac Co. is a monopolist in cigarette market in Nicotiana Republic, where the U.S. dollar is used as the
official currency. The firm faces the demand curve shown below. The firm has a constant marginal cost of
$2.00 per pack.
 If Tobac Co. could successfully carry out the first-degree (or perfect) price discrimination,
calculate the monopolist profit. Will the social surplus be maximized? What would be the
consumer surplus?

5. Third degree Price discrimination:

You are the only doctor in a small town and you have two patients, John and Mary, at your clinic.
John is willing to pay up to $30 for consultation and Mary is willing to pay up to $25. For both
patients, your only cost is your time which you value at $10 for each patient.
a.If you were to charge the same price to each patient, determine the price and the profit you can earn.
b. Assuming you know the reservation price of both patients, how would you charge the patients?
What is the type of price discrimination and what is your profit?

6. Tobac Co. is a monopolist in cigarette market in Nicotiana Republic, where the U.S. dollar is used as
the official currency. The firm has a constant (AC=) marginal cost of $2.00 per pack and the fixed
cost is $20 million. Through market research, the firm has found that there are two types of customer,
Type 1 and Type 2. The demand curves of the two types of customers, and the total market
demand curve, along with respective marginal revenue curves, are shown in the figures.
 a. If Tobac Co. could not carry out price discrimination, how many and at what price the firm would
sell? What would its profit be?

b. If it could carry out third degree price discrimination, how many and at what price would it sell in
each market? What would its profit be?

7. Second Degree Price discrimination: Bundling

Gaurav and Tarun like to drink juice with breakfast. Gerardo prefers mango juice, and Thomas
prefers apple juice. The table below provides each consumer’s maximum willingness to pay for a
bottle of mango juice and his maximum willingness to pay for a bottle of apple juice.

Willingness to pay for Mango Willingness to Pay for Apple

Consumer
Juice juice
Gaurav 6 3
Tarun 4 5

a. If the monopolist producer sells mango juice and apple juice separately, and it charges $4 per
bottle for mango juice and $3 for apple juice, how many consumers will buy mango and
apple juice and what will be its revenue?
b. If the monopolist producer sells mango juice and apple juice separately, and it charges $6 per
bottle for mango juice and $5 for Apple juice, how many consumers will buy mango and
apple juice and what will be its revenue?
c. If the monopolist producer sells mango juice and apple as a bundle at $8, how many
consumers will buy and how much revenue will it earn?
d. Is the Monopolist better off selling the juices separately or as a bundle?