A monopoly producer of drugs has a constant marginal cost of MC=8 and sells its product in two separated markets. The demand functions for the two separated markets are: • Market 1: P1=24-Q1 and • Market 2: P2=12-0.5Q2 i. Determine the firm’s profit-maximizing quantity and price in each market. Calculate the size of deadweight loss in each market and the total welfare loss caused by the monopoly. Illustrate the two separated market equilibria including the sizes of welfare loss with two monopoly market diagrams. ii. Calculate the size of monopoly profit or loss for each market. Based on the information provided, analyse the most critical reason that causes the monopoly to set prices differently in these two markets. iii. A new law was enacted that prohibits the monopoly from charging different prices in separated markets. With this new single-price law the monopoly is restricted to set only one single price no matter how many separated markets in which it monopolies. The board of directors of the monopoly has two options: either combine two markets into one market by summing up two demand functions or give up one of the two markets. Imagine that you were the chief economist working for the monopoly. How would you advise the monopoly’s directors to set a price for maximizing profit? Be specific about your recommended price for the directors under the new law. Evaluate whether all consumers will get better off after the singe-price regulation is enforced.
A monopoly producer of drugs has a constant marginal cost of MC=8 and sells its
product in two separated markets. The demand functions for the two separated
markets are:
• Market 1: P1=24-Q1 and
• Market 2: P2=12-0.5Q2
i. Determine the firm’s profit-maximizing quantity and price in each market.
Calculate the size of
caused by the monopoly. Illustrate the two separated market equilibria including
the sizes of welfare loss with two
ii. Calculate the size of monopoly profit or loss for each market. Based on the
information provided, analyse the most critical reason that causes the monopoly
to set prices differently in these two markets.
iii. A new law was enacted that prohibits the monopoly from charging different
prices in separated markets. With this new single-price law the monopoly is
restricted to set only one single price no matter how many separated markets in
which it monopolies. The board of directors of the monopoly has two options:
either combine two markets into one market by summing up two demand
functions or give up one of the two markets. Imagine that you were the chief
economist working for the monopoly. How would you advise the monopoly’s
directors to set a price for maximizing profit? Be specific about your
recommended price for the directors under the new law. Evaluate whether all
consumers will get better off after the singe-price regulation is enforced.
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