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    Calculating profit maximizing price and output level

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    A high-end lamp monopolist operates in the Mid-West where the demand for lamps is given by Q1=200-P1. Producing one lamp costs 10 per unit.

    (a) Derive the profit maximizing price and the profits at this price.

    (b)What is the demand elasticity at this price?

    Suppose now that the monopolist has the opportunity to expand to the East Coast.This would entail launching an advertising campaign at a cost of 1000,a one time expense. The demand on the East Coast is given by Q2 =160-3P2.The per-unit cost of selling lamps on the East Coast is identical to the cost of selling them in the Midwest.Suppose first that,because he is thinking of selling from his website,the monopolist must charge the same price in both markets .

    (c) What is the total demand when the monopolist charges a price P?

    (d) Derive the profit maximizing price and the profits at this price in the case where
    the monopolist must charge the same price in both markets.Would you recommend the monopolist to expand to this market?
    Now suppose that the monopolist will sell through a network of distributors,and can charge different prices on the East Coast and in the Mid West .

    (e)What price would the monopolist charge in the Mid-West?What price would the
    monopolist charge in the East?What are the total profits?Would yo recommend the monopolist to expand in this case?

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    Solution Preview

    (a) Derive the profit maximizing price and the profits at this price.

    Q1=200-P1
    On rearranging, we get
    P1=200-Q1

    Total Revenue in Mid West=TR1=P1*Q1=(200-Q1)*Q1=200Q1-Q1^2
    Marginal Revenue in Mid West=MR1=d(TR1)/dQ1=200-2Q1

    A monopolist will set its output level such that MR1=MC to maximize profits.
    Put MR1=MC
    200-2Q1=10
    2Q1=190
    Q1=95
    P1=200-Q1=200-95=$105

    Total Revenue=105*95=$9975
    Total Cost=10*95=$950

    Profits=Total Revenue-Total Cost=9975-950=$9025

    (b)What is the demand elasticity at this price?
    Q1=200-P1
    dQ1/dP1=-1

    He have calculated that P1=$105 and Q1=95

    Price elasticity of demand=(dQ1/dP1)*(P1/Q1)=-1*(105/95)=-1.05

    Suppose now that the monopolist has the opportunity to expand to the East Coast.This would entail launching an advertising ...

    Solution Summary

    Solution describes the steps to calculate profit maximizing output and price in the given case.

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