ECO 260

Fall 2005

Homework 2

 

Due Tuesday, October 11, 2005

 

1.  Suppose that a monopolist faces two markets with demand curves given by

 

P₁ = 100 – q₁

P₂ = 50 - .5q₂

 

Assume that the monopolist’s marginal cost is constant at $20 per unit.

 

If the monopolist can price discriminate, what price should it charge in each market in order to maximize profits?

 

What if it can’t price discriminate?  What would then be the market-clearing price and quantity?

 

Hint:  The demand functions for these markets can be written as

 

q₁ = 100 – P₁

q₂ = 100 – 2P₂

 

 

 

2.  Suppose that Six Flags Great Adventure Amusement Park charges one price for admission and another for rides.  The demand curve for rides is given by

 

P = 50 – 7q

 

Where q is the number of rides.  Additionally suppose that the marginal cost for each ride is $1.

 

What is the profit-maximizing price and quantity of rides at Six Flags?

 

What is the maximum price that Six Flags can charge for admission to the park if it practices first-degree price discrimination?

 

What is the total profit that Six Flags earns?