Question: consider a monopoly which can produce any level of output...
Consider a monopoly which can produce any level of output it wishes at a constant marginal (and average) cost of $5 per unit. Assume that the monopoly sells its products in two different markets separated by some distance. Suppose that transportation costs are too high, making resales between the two markets impossible. The inverse demand function for the first market is given by
and the inverse demand function for the second market is given by
(a) If the monopolist can maintain the separation between the two markets, how many units of the output should be sold in each market? What price will prevail in each market? What is the total monopolistic profit in this situation? Worth 5 points
(b) Illustrate your findings in part (a) on suitable diagrams with necessary details. Worth 4 points
(c) At the corresponding prices obtained in part (a), what are the price elasticity of demand, consumer surplus, and total welfare in each market? Worth 6 points
(d) Suppose now that the consumers face zero transportation costs for travel between the two markets. Discuss how this will impact the monopolist’s pricing across the two markets and the total profit earned. Explain your answer. Worth 5 points