You have been hired as a consultant by a firm producing bread to advise on a
pricing strategy that would enable the firm to maximize profits. This firm is a
monopolist which sells in two distinct markets, one of which is completely sealed
off from the other.
As part of the analysis, you establish that the total demand for the firm‟s output is
given by the following equation:
Q = 50 – 0.5P
and the demand for the firm‟s output in the two markets is given by the following
equations:

Q1 = 32 – 0.4P1 and
Q2 = 18 – 0.1 P2
Where: Q = total output
P = Price
Q1 = Output sold in Market 1
Q2 = Output sold in Market 2
P1 = Price charged in Market 1
P2 = Price charged in Market 2
The cost of production is given by C = 50 + 40Q
Where C = total cost of producing bread.
Required:
(a) The total output that the firm must produce in order to maximize profits. (4
marks)
(b) What price must be charged in each market in order to maximize profits? (2
marks)
(c) How much profit would the firm earn if it sold the output at a single price, and
if it discriminates? (5
marks)
(d) (i) The price elasticity of demand for the two markets at the equilibrium price
and quantity.
(4 marks)
(ii) Comment on how the price elasticity of demand may be used in making
economic decisions.
(3 marks)
(e) Under what conditions is price discrimination possible? (2
marks)