Suppose that a monopolist can produce any level of output it wishes at a constant marginal (and average) cost of KShs.5 per unit. Assume further that the monopolist sells its goods in two different markets that are separated by some distance. The demand curve in the first market is given by: Q1 = 55 – P1 Page 2 of 3 The second market’s demand curve is given by: Q2 = 70 – 2P2 a) If the monopolist can maintain the separation between the two markets, what level of output should be produced in each market and what prices will prevail in each market. b) What are the total profits in the situation above? c) How would the above answers change if it only cost demanders KShs.5 to transport goods between the two markets? d) What would be the monopolist’s new profit level in this situation? e) How would your answer change if transportation costs were to fall to zero?
4. Suppose that a monopolist can produce any level of output it wishes at a constant marginal (and average) cost of KShs.5 per unit. Assume further that the monopolist sells its goods in two different markets that are separated by some distance. The
Q1 = 55 – P1 Page 2 of 3
The second market’s demand curve is given by:
Q2 = 70 – 2P2
a) If the monopolist can maintain the separation between the two markets, what level of output should be produced in each market and what prices will prevail in each market.
b) What are the total profits in the situation above?
c) How would the above answers change if it only cost demanders KShs.5 to transport goods between the two markets?
d) What would be the monopolist’s new profit level in this situation?
e) How would your answer change if transportation costs were to fall to zero?
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