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Question Five [10 marks] Consider an island with exclusive fishing rights to their own waters. The fishing industry is unregulated and the production function, representing the yearly catch, is given by f (x) =22x - x2 /40 where is the number of boats launched. Yearly industry profit is split equally among fishing boats and the cost of launching a boat equals 80. Fish is sold at a world market price of p=40. A market failure is likely to occur in this market. Explain why and analyze the problem by comparing the profit maximizing solution for the fishing industry with "sustainable" fishing (revenue maximizing solution) and the free entry solution. Suggest a policy that leads to an efficient outcome. Question Six [ 10 marks] A monopolist faces two totally separated markets with inverse demand p=100-qA and p=160-2qB respectively. The monopolist has no fixed costs and a marginal cost given by mc= 2 /3 q Find the profit maximizing total output and how much of it that is sold on market A and market B respectively if the monopoly uses third degree price discrimination. a) What prices will our monopolist charge in the two separate markets? (6 m) b) Calculate the price elasticity of demand in each market and explain the intuition behind the relationship between the prices and elasticities in these two separate markets. (4 m) The End