Answered: Consider a monopolist who is selling…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Consider a monopolist who is selling his blockbuster drug in two markets where one market is much larger than the other. Suppose the demand in the two markets is given by q₁= 30 − p₁and q₂= 3 − p₂(quantity is measured in millions of complete dosages and price is in your favorite currency) and the marginal cost of production and distribution is roughly the same and equal to 1 per unit (c=1). This problem asks you to compare equilibrium outcomes (prices, quantities, profits, consumer surplus, and consumer surplus per unit of output) when the monopolist can price discriminate across the two markets versus when it must set a uniform price. It then asks you to comment on some recent policy proposals.

For each market separately, set up and solve the monopolist’s profit-maximizing problem. Specifically, write down/compute the following.
- Inverse demand and the profit functions.
- Equilibrium prices (), quantities () and profits ()
- Consumer surplus () and consumer surplus per unit of output (i.e., (CS_i/q_i)^∗for i = 1,2). If each patient needs only one complete dosage, then an interpretation of the later is CS per patient.

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Now suppose due to some outside reason, the monopolist must set a uniform price, i.e., p₁= p₂= p^uin the problem before.

Write down the monopolist’s problem and solve for the optimal price. (Hint: The aggregate demand is now q = 33 − 2p^u).
At the price computed above, compute the optimal quantities sold in each market, i.e., compute and and keep in mind that optimal quantity cannot be less than zero.

Compute also the profit earned in each market at the uniform price.

Compute consumer surplus and consumer surplus per capita in each market.
If you were a lobbyist for consumers in market 1, would you be in favor of price discrimination or of uniform pricing? Alternatively, if you were a lobbyist for consumers in market 2, what type of pricing would you prefer?
Now put yourself in the shoes of the CEO whose primary responsibility is to the share holders. If some legislation is passed that either explicitly forbids price discrimination or makes it nearly impossible to do so, what business strategy would you adopt? .

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