All problems below include an “unknown” parameter A, which is 1.5. Cadburys is a monopolist in the market for chocolate. It faces the inverse demand function P = 10 − 2Q, where P is the price per chocolate bar, and Q is the quantity produced. The cost of producing Q is C = Q2 A . (a) [10] What is cadburys monopoly profit? How much extra profit will cadburys make (over and above the standard monopoly profit) if it can access personal data and impose perfect price discrimination? (b) [20] Suppose that cadburys can either price discriminate (as in (a) above) or can make available free of cost, informative advertisement that shifts the inverse demand function to P =10+5A−2Q. Which option between advertising and full price discrimination will cadburys prefer? (c) [15] Based purely on consumer welfare, which option will be more desirable to the consumers? Explain your answer with intuition and a diagram. (d) [10] Suppose that the advertisement is done through an agent who charges a fixed fee of F. What is the maximum amount of F that cadburys (without the option of first-degree price discrimination) would be willing to pay?
All problems below include an “unknown” parameter A,
which is 1.5.
Cadburys is a monopolist in the market for chocolate. It faces the inverse demand
function P = 10 − 2Q, where P is the
produced. The cost of producing Q is C = Q2
A
.
(a) [10] What is cadburys
and above the standard monopoly profit) if it can access personal data and impose
perfect
(b) [20] Suppose that cadburys can either price discriminate (as in (a) above) or can make
available free of cost, informative advertisement that shifts the inverse demand function
to P =10+5A−2Q. Which option between advertising and full price discrimination
will cadburys prefer?
(c) [15] Based purely on consumer welfare, which option will be more desirable to the
consumers? Explain your answer with intuition and a diagram.
(d) [10] Suppose that the advertisement is done through an agent who charges a fixed fee of
F. What is the maximum amount of F that cadburys (without the option of first-degree
price discrimination) would be willing to pay?
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