regulation H.W#9

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Econ 6370 HW 9. Regulation - part 2

1. Assume that a water distribution monopoly serves two consumer types, industrial and residen-

tial. The demands by the two classes are as follows. Industrial: QI = 30−PI and Residential: QR = 24 − PR. The company has no costs other than the fixed cost of the pipeline, which is $328. Find the Ramsey prices.

2. Assume a natural monopoly with total costs C = 500 + 20Q and the firm tries to maximize

its profit. Market demand is Q = 100 − P. There are six “rich” consumers with each having inverse demands: p = 100 − 6.3q; also, there are four “pour” consumers, each with demands: p = 100 − 80q. The regulator bans third-degree price discrimination but allows any two-part tariff system. The monopolist will find the optimal two-part tariff. To find the optimal two-

part tariff, one possible approach is to exclude poor consumers. The other possibility is to

keep all consumers in the market.

(a) Find the optimal two-part tariff and profit for the case where the poor are excluded.

Compute the sum of consumer and producer surplus minus the $500 fixed cost (that is,

the find total surplus)

(b) Find the profit and total surplus for the case of all consumers retained in the market.

What is the optimal two-part tariff where all are retained in the market?

(c) Compare the efficiency of the tariffs in parts (a) and (b). Hint: efficiency is measured in

total surplus, not in profit.