ACTIVITY 1

Based on the best available econometric estimates, the market elasticity of demand for your firm's

product is

-1.50. The marginal cost of producing the product is constant at $75, while average total

cost at current production levels is $2

00. Determine your optimal per unit price if:

a. You are a monopolist.

b. You compete against one other firm in a Cournot oligopoly.

c. You compete against 19 other firms in a Cournot oligopoly.

ACTIVITY 2

1. You are the manager of a monopoly that sells a product to two groups of consumers in

different parts of the country. Group 1's elasticity of demand is -2, while group 2's is -6. Your

marginal cost of producing the product is $10.

a. Determine your optimal markups and prices under third-degree price discrimination.

b. Identify the conditions under which third-degree price discrimination enhances profits.

2. You are the manager of a monopoly. A typical consumer's inverse demand function for your

firm's product is P =100- 20Q, and your cost function is C(Q) = 20Q.

a. Determine the optimal two-part pricing strategy.

b. How much additional profit do you earn using a two-part pricing strategy compared

with charging this consumer a per-unit price?

ACTIVITY 3

You are an industry analyst that specializes in an industry where the market inverse demand is P =

100 - 5Q. The external marginal cost of producing the product is MCExternal = 10Q and the internal cost

is MCInternal = 20Q.

a. What is the socially efficient level of output?

b. Given these costs and market demand, how much output would a competitive

industry produce?

c. Given these costs and market demand, how much output would a monopolist

produce?

d. Discuss actions the government could take to induce firms in this industry to produce

the socially efficient level of output.