Consider the case of the monopolist Pear. For its next generation of phones the monopolist has to decide which quality level it wants to choose. The quality of the product k can either be high or low. If the quality is low then k = 1. If the quality is high then k = 3. Inverse demand for the new product is predicted to be as follows P = k(20−Q). So a higher quality increases the willingness to pay for the product. If the quality is low(k = 1), the marginal cost is 2. If the quality is high(k = 3), the marginal cost is 24. Pear incurs an extra cost of 30 if it decides to produce the high quality product. This extra cost is 0 in case the quality is low. The monopolist can only produce one of the two products. 

(a) Determine the price and quantity a monopolist would set for both cases if it employs uniform pricing. Which option would give the monopolist the highest profit? 

(b) Calculate the Lerner index for both cases. Comment on the differences. 

(c) In case the monopolist sets the prices and quantities, which quality level do consumers prefer? Which quality level gives the lowest dead weight loss? 

(d) Suppose the monopolist is able to perfectly price discriminate. Which quality level will it provide? Compare to (a).

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a The price and quantity a monopolist would set for the ... View the full answer