Problem Set #2

Micro II –Winter Term 2022 NAME:

DUE DATE: Monday, 10th Oct. 2022 by 1:30 pm.

1. (Multimarket Price Discrimination) A monopolist sells in two states and practices price discrimination by
charging separate prices in each state. The monopolist produces at constant marginal cost MC  10. Demand
in market 1 is Q1  50 – p1. Market 2 demand is Q2  90 – 1.5p2. What price will be charged in each market?
Suppose a third party enters the market, not as a producer, but as a reseller, capable of reselling by
transporting the goods from market to market at a cost of $4 per unit. How does this affect the monopolist?
2. (Multimarket Price Discrimination) A monopolist is deciding how to allocate output between two
geographically separated markets (East Coast and Midwest). Demand for the two markets are:
P1 = 15 - Q1

P2 = 25 - 2Q2

The monopolist’s total cost is C = 5 + 3(Q1 + Q2 ). What are price, output, profits, marginal revenues, and
deadweight loss (i) if the monopolist can price discriminate?
3. (Bundling) Your firm produces two products, the demands for which are independent. Both products are
produced at zero marginal cost. You face four consumers (or groups of consumers) with the following
reservation prices:

Consumer Good 1 ($) Good 2 ($)

a. Consider three alternative pricing strategies: (i) selling the goods separately; (ii) pure bundling; (iii)
mixed bundling. For each strategy, determine the optimal prices to be charged and the resulting
profits. Which strategy would be best?
b. Now suppose that the production of each good entails a marginal cost of $30. How does this
information change your answers to (a)? Why is the optimal strategy now different?
Question 4: (TWO-PART TARIFF) As the owner of a tennis club, you must decide on membership fees and
fees for court time.

Serious players have weekly demand (where P = per hour fee):

Occasional players have weekly demand:

Assume that there are 1000 players of each type. MC = 0. Fixed costs are $5000 per week. Serious and
occasional players look alike so you must charge them the same prices.

a. If you want to limit the club to serious players only, how should you set membership fees? How should you
set per hour court fees? What are profits per week?

b. If you want to increase your customer base so that both serious and occasional players, how should you set
membership fees? How should you set per hour court fees? What are profits per week?
Question 5: The BCY Corporation provides accounting services to a wide variety of customers, most of whom
have had a business association with BCY for more than five years. BCY's demand and marginal revenue
curves are:
P = 10,000 - 10Q
MR = 10,000 - 20Q.
BCY's marginal cost of service is:
MC = 5Q.

a. If BCY charges a uniform price for a unit of accounting service, Q, what price must it charge per unit, and
how many units must it produce per time period in order to maximize profit? Calculate the consumer surplus.
b. If BCY could enforce first-degree price discrimination, what would be the lowest price that it would charge
and how many units would it produce per time period?
c. With perfect price discrimination and ignoring any fixed cost, what is total profit? How much additional
consumer surplus is captured by switching from a uniform price to first-degree price discrimination?
Question 6: Laughlin and Sons is a company that provides estate planning services to 100 wealthy clients.
Although the clients have different wealth levels, their demands for the hourly estate planning services are
identical. The aggregate annual demand for estate planning services facing Laughlin and Sons is Q = 20000 –
200P where Q is the total hours of estate planning services and P is the hourly rate charged for the services, and
the firm’s total cost of providing the estate planning services is TC = 80Q. The firm wants to establish a two-
part tariff scheme for charging the clients, and the fees include an annual fixed retainer (entry fee) plus an
hourly rate (usage fee).

a. What is the firm’s marginal cost of providing estate planning services? What is the demand curve for a
representative client?
b. What are the profit maximizing levels for the retainer and hourly rate? What is the firm’s aggregate annual
profit under the two-part tariff scheme?
c. Suppose Laughlin and Sons has a local monopoly on estate planning services. What are the profit
maximizing hourly rate (price) and quantity under a single-price monopoly? How does the profit earned under
the single-price monopoly compare to the profit earned under the two-part tariff scheme?
Question 7: Internet
service in the local market is supplied by Laura's Internet Service. Laura has two types of
consumers. The first type of customers is local businesses, and their demand for internet service is

The second type is residential customers, and their demand is

Laura's marginal cost function is

If Laura practices third-degree price discrimination and charges business customers $35 and residential
customers $15, is Laura maximizing profits?