A monopolist operates in the market. The monopolist\'s cost function is:C(q) = 5
ID: 1107972 • Letter: A
Question
A monopolist operates in the market. The monopolist's cost function is:C(q) = 54-The monopolist faces 100 consumer buys only one good and their willingness to pay is: ut = 10. a. At what price would the monopolist sell? What will be its profits? In period 2, a second identical company is considering entering into the market. However the consumers got used to using the product. They would incur a switching cost s to buy from company two. Assume that the switching cost acts like a decrease on the willingness to pay for firm 2's product if the consumer already bought from firm 1. b. If the two companies set their prices simultaneously, how would they set prices? c. If firm 2 has a capacity of 30, would your answer changes? d. What would be the equilibrium If both firms had capacity of 30? What are the profits? e. How could a monopolist change the switching cost?Explanation / Answer
Monopolist's cost funtion c(q) = 5q
There are total of 100 consumer and each buys only one good, so total demand for a good 'q' = 100
Consumer's willingness to pay u = 10
So, the price of each good = 10
a) Monopolist price will be 10 as he want to maximize its profit
profit = revenue - cost
profit = p*q - 5q
profit = 10*100 - 5*100
profit = 500
b) Switching cost = s
Both company can charge maxium of 10
If price set by first producer = 10
then, price of good set by second producer = 10 - s
c) No, answer would not change till the time, value of s is less than equal to 5.
d) If q1 =30
q2 = 30
profit for 1st = 30*10 - 30*5
profit for 1st = 150
profit for 2nd = 30*(10-s) - 30*5
profit for 2nd = 150 - 30s