Consider the problem of a monopolist that sells its product on two different markets m, with m=1,2. Each market has an aggregate demand function given by 1200−α_m*p_m, where p_m denotes the price in market m, and α_m=m measures the responsivity of demand to prices in market m.
The monopolist's cost function is given by c(q)=12q2, where q denotes the total amount produced for all markets.
The monopolist is owned by a foreign company, so none of the monopolist's profits are received by the consumers in these markets.
The law allows the monopolist to charge different pricees in different markets, but does not allow any other forms of price discrimination.
(i)What is the equilibrium level of production in market 2?
(ii)What is total consumer surplus in the economy (i.e., taking both markets into account)?
(iii)Suppose that the government behind market 1 introduces a tax of $100 per unit on the monopolist's sales in its market (paid by the firm), and that the tax revenue is given back to consumers in market 1 using lump-sum transfers. Suppose also that no such tax is introduced by the government behind market 2.
What is the new equilibrium level of production in market 2?
(iv)What is the the new total level of consumer surplus in the economy (including the tax revenues)?
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