A monopolist serves a market with an aggregate demand function given by Q = 36 – 3P. The monopolist’s cost function is given by C(Q) = 2Q.
a. How much profit can the monopolist generate with first-degree price discrimination if resale can be prevented? What is the associated deadweight loss relative to the competitive level of output?
b. Suppose that the monopolist can partition its market into two separate submarkets. The demand function for submarket 1 is given by Q1 = 20 – 2P1 and the demand function for submarket 2 is given by Q2 = 16 – P2. What prices would this monopolist set if she practices third degree price discrimination? What is the level of profits that would be realized if resale can be prevented? What level of profits would the monopolist realize if resale cannot be prevented? Provide the economic basis for your claim.
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