Problem 3

Market demand for the nuclear substance pluranium is: Price ($ per megatonne) Quantity (megatonnes) 90 80 70 N 60 3 50 4 40 30 6 20 10 8 O 9Pluranium is supplied to the world market by a monopolist. Suppose that the marginal cost of supplying an extra megatonne of pluranium is constant at $15, and that the fixed cost of production is $50. a) (6 marks) Assume that Pluranium must charge the same price to all customers. What will be the profit-maximisng quantity of pluranium for the monopolist to supply? What will be the profit- maximising price? What level of profits will be earned by the monopolist? Explain how you have derived each answer. b) (3 marks) Suppose that the monopolist is able to engage in 1st degree (perfect) price discrimination. What quantity of pluranium will it choose to sell? What will be its profits? Explain how you have derived each answer. c) (6 marks) Suppose that the monopolist can segregate market demand into demand in two global regions - North world and South world - as follows:North world South world Price ($ per Quantity Price ($ per Quantity megatonne) (megatonnes) megatonne) (megatonnes) 90 0 90 80 80 70 N 70 0 60 3 60 O 50 3 50 40 3 40 2 30 30 3 20 3 20 4 10 3 10 O 3 0 Show that if the monopolist is able to charge a separate price to each region - North world and South world - that it can increase its profits relative to the level of profits when it charges a single price to all buyers (as in part (c)). Explain why the firm is able to alter its profits by pricing in this way