1.

A monopolist faces a demand curve Q = 300 – 3P and has the total cost curve
TC(Q) = 80 + 20Q + Q2. What are marginal revenue and marginal cost? What is the profit maximizing
price and quantity? What is the maximized profit?

2. What is the Lerner Index? How does it relate to the elasticity of demand? If a monopolist faces a
constant marginal cost of 6 and a constant (firm) elasticity of demand of -4, what is the monopoly
price?
3. What is first-degree price discrimination? Is the outcome under perfect price discrimination
allocatively and productively efficient? How does your answer change if the monopolist cannot price
discriminate?

4. A monopolistic firm is selling two goods produced at zero marginal cost. The demands for them are
independent. The firm considers (a) no bundling, (b) pure bundling, and (c) mixed bundling. Which one
is the most profitable?

Willingness to pay ($)

Consumer Product 1 Product 2
David $90 $5
Jennifer $40 $60
John $5 $85
5. A monopolist is operating in two separate markets. The inverse demand functions for the two
markets are P1 = 35 – 2 Q1 and P2 = 28 – 2.5Q2. The monopolist’s total cost is TC = 1 + 3(Q1 + Q2).
The monopolist can price discriminate. Which kind of price discrimination is relevant here? What are
the profit-maximizing quantities and prices in each market, the monopoly profit, and total consumer
surplus?

6. Now the monopolist is Q5 above forced to charge the same price in both markets. Combine the
demand functions above and find the profit-maximizing quantity, price, the monopoly profit, and total
consumer surplus? (Mind the kink on the aggregate inverse demand)
7. A software company is making two versions of its product, which target consumers with high and
low willingness to pay, as given in the table below. If there is zero marginal cost for the firm in both
versions, what should be the incentive compatible second degree discriminated prices? Is this profit
maximizing?
Willingness to pay ($)
Consumer Premium Edition Normal Edition
High WTP 55 20
Low WTP 30 10

8. A firm in a monopolistically competitive industry faces the (firm-specific) demand curve

P = 55 – Q. The total cost is TC = 3Q. Find the firm’s profit maximizing quantity, its price, its profit.
What is likely to happen in the long run?
9. Describe and illustrate the difference between perfect competition and monopolistic competition in
the long run. Comment on long run profit, price sensitivities that firms are responding to as well as
welfare and efficiency outcomes in both cases. (6 points)

.
PART TWO (10 points each, 40 points total). Answer the following problems in the space provided.
Please show your work in an organized way with clearly labeled graphs if you choose to use any.
11. Two identical firms are engaged in Cournot competition, with cost functions
TCA(QA) = 10 QA and TCB(QB) = 10 QB. The market demand is given by P = 610 – 2Q.
a) Find the Cournot-Nash equilibrium and profit for each firm.
b) Find the Stackelberg equilibrium if A leads and B responds.
c) What are the prices, quantities, and profits for the firms if they decide to collude and share profits
equally?
d) Graph and label the reaction curves for the two firms and the collusion curve on the same graph in
the QA , QB space. Identify the equilibria from parts a-c.
e) Show the equilibria in the previous parts on the inverse demand function. Calculate and identify
consumer surplus and deadweight loss in each equilibrium.
12. Suppose the city of LA is considering a proposal to award an exclusive contract to a cable
television carrier. The demand and total cost functions have been estimated to be:
P = 66 - 0.5 Q
TC = 1320 + 0.25 Q2
Where Q = number of cable subscribers in thousand unit and P = price of basic monthly cable service.
You have been hired to consult on the following questions:
a) What would be the socially efficient price and quantity (the competitive case where MC=P)?
b) What price and quantity would be expected if the firm can operate completely unregulated?
Calculate profit and consumer surplus.
c) What would be the minimum price charged to the marginal consumer if the contractor can execute
first degree price discrimination? What is the change in profit and consumer surplus?
d) Would it be feasible to regulate this firm with the allocatively efficient price cap?
e) Calculate the deadweight loss (if any) in (b) and (c). Show on a graph.
13. A movie theater faces the following hourly inverse demand curves:
Seniors: PS = 67 -2Q
Adults: PA = 123- 2Q
The theater has a fixed cost of $30, and a constant marginal cost of $3 per ticket.
a) If the movie theater uses segmenting, calculate the ticket prices charged to adults and seniors.
b) How much profit does the movie theater earn from segmenting?
c) Suppose the theater is legally prevented from using price discrimination. What price will they charge
per ticket? How much profit will they earn?
d) Find the total consumer surplus with segmenting and the total consumer surplus with no price
discrimination. Which one makes the consumers better off?
14. Two firms with differentiated products are competing in price. Firm A and B face the following
demand curves: QA =140 - PA + PB and QB =80 - PB + 2PA respectively. Both firms have zero marginal
costs, but face a fixed cost of 10.
a) Give equations for and graph each firm’s reaction curve.
b) If both firms set their prices at the same time, what is the Nash equilibrium price and quantity for
each firm? What is the profit?
c) Suppose A sets its price first and then B responds. What price and quantity does each firm set now?
d) Compare the profits from part b and c. Which firm benefits more from the sequential price
choosing?