Equilibrium levels of output
Not what you're looking for?
A monopolist produces two different goods. The (inverse) demand for each good is given as:
p_1 = theta - (alpha)q_1 + (beta)q_2
p_2 = theta + (alpha)q_1 - (beta)q_2
The monopolist produces both of these goods at a constant unit cost (c > 0) and maximizes the profit function below by setting the output of each good.
(pi) = p_1q1 + p_2q_2 - cq_1 - cq_2
You can interpret the parameters as follows. The theta parameter is the intercept term for both demand functions. Note that it is necessary for theta > c. The alpha and beta parameters are measures of differentiation. As alpha gets smaller, or as beta gets larger, the products are increasingly heterogeneous.
a. Find the equilibrium levels of output for goods 1 and 2.
b. Show whether these levels of output maximize profits.
c. Use comparative statics to show whether this monopolist's equilibrium profits will rise or fall if the monopolist makes these goods more similar (i.e. more homogeneous). That is, as alpha and beta change.
Purchase this Solution
Solution Summary
The Solution finds the equilibrium levels, identifies whether the levels maximize profits, and compares the profits if the goods are more homogeneous.
Purchase this Solution
Free BrainMass Quizzes
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.
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.