Purchase Solution

Important Aspects of Profit Maximization

Not what you're looking for?

Ask Custom Question

1. A monopolist has the possibility of price discriminating between domestic and foriegn markets for a product. The demands are Qd = 21-0.1P in the domestic market and Qf = 50-0.4P in the foriegn market. The monopolist's short-run total cost function is STC = 2000+10Q, where Q = Qd+Qf.

a. Calculate the profit-maximizing, price-quantity combination for the monopolist with the price discrimination in each market and without price discrimination.

b. Graph your answers. (Three graphs are necessary.)

c. Compare the profit differential between price discrimination and no price discrimination. Does it make any economic sense for this firm to engage in price discrimination? Why or why not?

2. Larry, Curly and Moe run the only saloon in town. Larry wants to sell as many drinks as possible without losing money. Curly wants the saloon to bring in as much revenue as possible. Moe wants to make the largest possible profits. Using a single graph of the saloon's demand and marginal revenue curves and its marginal cost and average cost curves, where MC = AC, show the price quantity combination favored by each of the three partners.

3. The monopolist's total revenue function is TR = 1400Q-7Q^2. His short-run total cost function is STC = 1500+140Q.

a. Calculate the profit-maximizing, price quantity combination.
b. Calculate the revenue-maximizing, price-quantity combination.

Purchase this Solution

Solution Summary

The solution breaks down all the steps that are required to get to the right answer. The solution does an excellent job of explaining the concepts asked in the question. All the problems are solved in a detailed and logical manner which is really easy to understand and follow along. The solution is best for students who are looking to develop understanding of these topics and then apply the same concepts in similar problems.

The response also provides detailed graphs in the attachment. Overall, an excellent response.

Solution Preview

1.a) with the price discrimination, the monopolist charges Pd in the domestic market and Pf in the foreign market. Then Q = Qd+Qf = (21-0.1Pd) + (50-0.4Pf) and Total revenue is
TR = Pd Qd+ Pf Qf = Pd(21-0.1Pd) + Pf (50-0.4Pf) = (21 Pd -0.1Pd^2) + (50Pf -0.4Pf^2).
And STC = 2000+10Q = 2000+10 (21-0.1Pd + 50-0.4Pf) = 2710 - Pd - 4Pf
Profit = TR - STC = (21 Pd -0.1Pd^2) + (50Pf -0.4Pf^2) - (2710 - Pd - 4Pf)
To maximize profit, we use first order condition:
dProfit / dPd = 21 - 0.2 Pd +1 = 0 (1)
and dProfit / dPf = 50 - 0.8 Pf +4 = 0 (2)
from (1) we can get Pd* = 110, substitute it into Qd* =21-0.1Pd* = 21-0.1*110=10
and from (2) we can get Pf* = 67.5, substitute it into Qf* =50-0.4Pf*=50-0.4*67.5 = 23
Then Q*= Qd*+Qf* =10+23=33, So TR= Pd Qd+ Pf ...

Purchase this Solution

Free BrainMass Quizzes
Economics, Basic Concepts, Demand-Supply-Equilibrium

The quiz tests the basic concepts of demand, supply, and equilibrium in a free market.

Elementary Microeconomics

This quiz reviews the basic concept of supply and demand analysis.

Economic Issues and Concepts

This quiz provides a review of the basic microeconomic concepts. Students can test their understanding of major economic issues.

Pricing Strategies

Discussion about various pricing techniques of profit-seeking firms.

Basics of Economics

Quiz will help you to review some basics of microeconomics and macroeconomics which are often not understood.