Subject 1: Multiplant Monopolist
Coconuts S.A. is the only firm that has the right to process coconut milk in Coconut
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Republic. The coconut milk processing takes place in two factories (A and B). In
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factory A the cost function is
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2 and in factory B it is
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2.
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The inverse demand function is ( ) = 0.5 , where
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is the price
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=
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+
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and ( ) = 2
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= 64 − 2
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of processed milk in Coconut Republic.
1.Determine the market equilibrium and the Coconuts S.A. profits.
2.How will Coconuts S.A. allocate total volume of coconut milk to its factories? Provide the economic intuition behind your finding.
(Hint: do the calculations with one decimal point).
Subject 2: Monopoly and Sales of Goods in Packages
You are the manager of the only company organizing recreational cruises to a certain remote atoll in the Pacific. The company offers two services, namely a two-way trip by a luxury yacht to the atoll and accommodation at the hotel “The White Shark”. The company’s marginal and average cost of both the trip and the accommodation is 3,000 euros. As a manager you have the option to sell each service separately or to sell them as a package (i.e., sell both services in a single price). Depending on the firm’s policy, a customer may buy one service, buy two services (separately), or buy the package. Customers who buy only one service have always an alternative for the second. For example, a customer who will not use the firm’s luxury yacht for traveling may use her/his own yacht to go there or a customer who will not stay at the “White Shark” may camp under the stars. At the moment, there are three potential customers and their respective maximum willingness to pay for each service are provided in the following table (in euros):
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Customer
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Trip
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Accommodation
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Anne
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1,000
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6,000
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John
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4,000
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4,000
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Manousos
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6,000
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1,000
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1.Suppose that you decided to sell each service separately. Determine the respective optimal prices and your firm’s profit. (Mark 1.0)
2.Suppose that you opted to sell them as a package. Determine the optimal price of the package and the company’s profit.
3.Which of the two, i.e., sell separately or sell as a package, is the best strategy for your firm?
(Hint: it may be the case that not all customers are served in the optimal solutions).
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Subject 3: Market Equilibrium and Government Intervention (25%)
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Suppose that the demand and supply functions for tobacco are given from:
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and
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if
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and zero otherwise. Please
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answer
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the
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following:
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= −4 +
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≥ 4
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=
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20 −0.5
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1.
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Find the market equilibrium and determine the corresponding consumer and
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producer surpluses.
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