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ECON 4301 A – Market Structure and Firm Behavior Department of Economics Carleton University

Student Name Student ID Assignment No

Question 1a 1b 1c 1d 2a 2b 2c 2d 2e Total

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ECON 4301A Assignment 2: due Feb-09 Attach the cover sheet provided in the 1st page and staple your pages together Type your answers following the order of the questions

Problem 1 (25 points) Suppose that the monthly demand for AIDS treatment is PN = 100 − QN in North America and PS = 60 − QS in Sub-Saharan Africa due to lower income. The marginal and average variable cost of producing a month’s treatment is $20. The treatment’s manufacturer holds a patent and is a monopolist. For the calculations below assume zero fixed costs. a (9). Derive the monopolist’s two-part pricing scheme that allows 1st-degree price discrimination. The scheme consists of a fixed fee and a per-unit price. b (6). Calculate the implied profit, consumer surplus, and total welfare for each market. c (7). Derive the monopolist’s block-pricing scheme that generates the same profit with the two-part pricing scheme you obtained in (a). d (3). Calculate the implied profit, consumer surplus, and total welfare in each market.

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Problem 2 (75 points) In this problem, you will be asked to derive the block-pricing scheme that maximizes profit in the case of 2nd-degree price discrimination when a monopolist faces a consumer with high demand PH = 80 − QH , a consumer with low demand PL = 50 − QL , and constant marginal and average variable cost of $10. Assume that the monopolist serves both consumer types and use TL and TH to denote the fixed fees charged to the consumers with low and high demand, respectively. For the calculations below assume zero fixed costs. a (15). Write the monopolist’s profit-maximization problem in terms of QL , QH , TL , and TH . Do not include the IR and IC constraints. You will provide them below. b (15). Write the IR constraint for the consumers with low demand. c (15). Write the IC constraint for the consumers with high demand. d (15). Using your answers in (a) and (b), write the monopolist’s profit maximization problem in terms of QL and QH . e (15). Calculate the implied profit, consumer surplus, and total welfare.

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