Suppose a market is served by a monopoly manufacturer selling toa single customer. The customer’s inverse demand is given by P = 50− (1/10)Q. The monopoly’s marginal cost is constant at 20, andthere are no fixed costs. Show your work for each questionbelow.
(a) If the monopoly can only charge a single price, what pricedoes it charge? What are its profits?
(b) Now suppose the monopoly can use a two-part tariff. Find thevalues of the fixed fee, f, and price per unit, p, that maximizeits profits.
(c) Next, suppose a customer joins the market who is willing topay $80 per unit for up to 90 units (i.e., demand is perfectlyelastic at $80 up to a quantity of 90). If the monopoly charges thef and p you found in (b), what are its profits now?
(d) Suppose the monopolist continues to use a single two-parttariff when selling to both customers. Provide an example of afixed fee, f 0 , and price per unit, p 0 , that bring themonopolist higher profits than in (c). Proceed carefully andexplain in words why the change helps to increase profits,
