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Questions › IIT JAM › IIT JAM 2021 › Q31
2 marksMicroeconomics › Monopoly and price discrimination › Taxes and monopolyHardabout 3 min

IIT JAM 2021 Question 31: Monopoly and price discrimination

An album has demand Q=40000−800PQ = 40000 - 800PQ=40000−800P and unit production cost Rs. 8. A profit-maximizing recording company offers the singer these contracts:

(i) 20% of album sales revenue,
(ii) Rs. 2 per album sold,
(iii) a fixed fee of Rs. 32,000.

Which is/are correct?

Select all that apply.

Answer and worked solution

Answer: (A) and (D)

Under the per-album contract (ii) the firm's marginal cost is 8+2=108 + 2 = 108+2=10, so it sets P=30P = 30P=30, sells 160001600016000, and the singer earns 2×16000=320002 \times 16000 = 320002×16000=32000. Under the fixed fee (iii) the firm faces marginal cost 888, sets P=29P = 29P=29, and the singer earns the flat 320003200032000. So (ii) and (iii) pay the same, statement (D).

Under the revenue-share contract (i) the firm keeps 80%80\%80% of revenue, sets P=30P = 30P=30, sells 160001600016000 for revenue 480000480000480000, and the singer's 20%20\%20% is 960009600096000. This exceeds 320003200032000, so contract (i) pays the most, statement (A). The correct options are (A) and (D).

The trap: (C) Contract (iii) yields the highest payment to the singer

The fixed fee looks large but the revenue share scales with the firm's substantial sales, so (i) dominates; (ii) and (iii) happen to coincide at 32000.

Plain-text version

An album has demand Q = 40000 - 800P and unit production cost Rs. 8. A profit-maximizing recording company offers the singer these contracts: (i) 20% of album sales revenue, (ii) Rs. 2 per album sold, (iii) a fixed fee of Rs. 32,000. Which is/are correct? (A) Contract (i) yields the highest payment to the singer (B) Contract (ii) yields the highest payment to the singer (C) Contract (iii) yields the highest payment to the singer (D) Contract (ii) and (iii) yield the same payment to the singer

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

What this question tests

This question is on Taxes and monopoly, part of Monopoly and price discrimination in Microeconomics.

How a specific tax or a profit tax passes through to the price of a monopolised good.

TestStop has 8 past-paper questions on this subtopic.

Take this paper as a timed mockMore on Taxes and monopoly

Question from the IIT JAM 2021 paper. Solutions are TestStop's own. Not affiliated with or endorsed by any examination authority.