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Questions › DSE › DSE 2018 › Q44
4 marks, −1Microeconomics › Monopoly and price discrimination › Monopoly equilibrium and marginal revenueHardabout 3 min

DSE 2018 Question 44: Monopoly and price discrimination

A monopolist faces demand D(p)=α−pD(p) = \alpha - pD(p)=α−p and cost function C(q)=cqC(q) = cqC(q)=cq. She can advertise to increase demand: advertisement level θ\thetaθ costs θ2/2\theta^2/2θ2/2 and shifts the demand function by θ\thetaθ, so the new demand is D(p)=α+θ−pD(p) = \alpha + \theta - pD(p)=α+θ−p. The monopolist's profit is

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A monopolist faces demand D(p) = α - p and cost function C(q) = cq. She can advertise to increase demand: advertisement level θ costs θ²/2 and shifts the demand function by θ, so the new demand is D(p) = α + θ - p. The monopolist's profit is (A) (α - c)²/4 (B) (α - c)²/2 (C) (α - c - θ)²/4 (D) (α - θ)²

Also written as: A monopolist faces demand D(p) = alpha - p and cost function C(q) = cq. She can advertise to increase demand: advertisement level theta costs theta^2/2 and shifts the demand function by theta, so the new demand is D(p) = alpha + theta - p. The monopolist's profit is

Monopoly and price discrimination has come up 128 times in 7 exams since 2004.

What this question tests

This question is on Monopoly equilibrium and marginal revenue, part of Monopoly and price discrimination in Microeconomics.

How a monopolist sets price and output where marginal revenue equals marginal cost.

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Question from the DSE 2018 paper. Solutions are TestStop's own. Not affiliated with or endorsed by any examination authority.