ID:_________________ Name:_________________ Microeconomics spring 2021, NCKU, Dept.

of Econ Recitation 8

1. A monopolist faces a group of consumers (whose number is normalized to 1) with the same inverse
demand as P(Q)=400−2 Q when selling Q units. Suppose it produces with the total cost function
C ( Q ) =15,000+40 Q when producing Q units.
a. Find the maximal profit of the monopoly if it can perfectly price discriminate.
MR=400−2 Q=40; the monopolist will produce 180 units.
Its PS is 1 ∙ ( 400−40 ) ∙180=32,400 .
2

Its profit will be R−C= 1 ∙ ( 400 +40 ) ∙ 180−22,200=39,600−22,200=17400

2

or π=PS−FC= 1 ∙ ( 400−40 ) ∙ 180−15,000=32,400−15,000=17400 .

2
b. Find the maximal profit of the monopoly and the DWL if it sells with two-block pricing.
π=( 400−2Q1 ) Q1 + ( 400−2 Q2 )( Q 2−Q1 )−15,000−40 Q2;
Q1=60 ; Q2=120 ; P1=280 ; P2=160 ;
π=16,800+ 9,600−15,000−4,800=6,600;
DWL=3600 (Note CS=3600+3600=7200 so CS+ π +DWL+FC=32,400)
P
400

280

220

160

40

Q
60 90 100 120 180 200

c. Find the maximal profit of the monopoly and the DWL if it sells with three-block pricing.
π=( 400−2Q1 ) Q1 + ( 400−2 Q2 )( Q 2−Q1 ) + ( 400−2 Q3 ) ( Q3−Q2 )−15,000−40Q3 ;
Q1=45; Q2=90; Q3=135 ; P1=310 ; P2=220 ; P3=130 ;
π=13,950+ 9,900+5,850−15,000−5,400=9,300;
DWL=2025 (Note CS=2025+2025+2025=6050 so CS+ π +DWL+FC=32,400)
 P
400

310

220

160
130

40

Q
45 90 100 135 180 200

2. A monopolist faces two consumers with individual demands q 1 (p)=60−0.5 p and q 2 (p)=50−0.5 p
separately when facing price p. Suppose it produces with the constant marginal cost of $20 without any
other cost.
a. If the monopoly sells with the same uniform price in both markets, find the social welfare.
π=( p−20)(110− p),
∂π 1 1
=0 → p¿ =65; q 1 ( p ) +q 2 ( p)=45 ; π=2025 ; CS= ( 20∙ 10 ) + ( 10+ 45 ) ∙ 35=1062.5; Because
∂p 2 2
there’s no fixed cost, SW =π +CS=3087.5; DWL=1012.5 .

120

110

65

20

Q
10 45 90 110

Market 1: SW 1=( 45+100 ) ∙ 27.5 =1993.75,

2
 120

65

20

27.5
30 50 60

Market 2: SW 2=( 45+80 ) ∙ 17.5 =1093.75

2

100

65

20

17.5 25 40 50

b. If the monopoly sells with discriminating prices in two markets, find again the social welfare.
π 1=(p 1−20)(60−0.5 p 1),
∂π1 25
=0 → p1=70 ; q 1 ( p1 ) =25; SW 1=( 100+50 ) ∙ =1875
∂ p1 2
 P
120

70

20

Q
25 30 50 60

π 2=(p 2−20)(50−0.5 p 2),

∂π2 20
=0 → p2=60 ; q 2 ( p2 ) =20; SW 2=( 80+ 40 ) ∙ =1200
∂ p2 2
P
100

60

20

Q
20 25 40 50

SW =SW 1 + SW 2=3075<3087.5 . DWL=625+ 400=1025.

c. If the monopoly sells with discriminating prices in two markets, find the price elasticity of demand
in the two markets.
d q1 p 1 70 −7 ,
ε 1= =−0.5 ∙ =
d p1 q1 25 5
d q 2 p2 60 −3 ,
ε 2= =−0.5 ∙ =
d p2 q2 20 2

Again, the (2nd) market that is more elastic ( −3 < −7 ) was charged with a lower market price
2 5
(60<70).