Download 5. Dry cleaners often charge substantially different prices for the

5. Dry cleaners often charge substantially different prices for the cleaning of men’s and
women’s clothes. Suppose that the marginal cost of cleaning a man’s shirt or a woman’s
blouse is $1, but that men and women have different monthly demand functions for
dry cleaning. The individual demand functions are:
Pw = 10 − Qw
Pm = 8 − 2Qm
Where the subscripts indicate whether the demand is for women (w) or men (m).
Assume that there are 100 men and 100 women in an economy.
(a) What prices would a price discriminating monopoly firm set for cleaning a man’s
shirt and a woman’s blouse? Comment on how these different prices reflect the
elasticity for dry cleaning in the two markets. Calculate total profits.
(b) Now assume that the government prohibits dry cleaner’s from discriminating on
the bases of gender. If the dry cleaner must charge a single, uniform per unit
price, what is the new profit maximizing price and quantity? Calculate total
profits.
(c) Dry cleaner’s find that they can make higher profits without violating the governments gender discrimination laws if the offer both men and women a laundry
service whereby for a fixed monthly fee they can dry clean shirts at a reduced
price. What is the optimal per unit charge per shirt and fixed monthly fee?
Calculate the firm’s total profits.
5
3. (20 points) Suppose a monopoly can produce any level of output it wishes at a constant
marginal cost of $2.00 per unit. The monpoly sells its goods in two different markets
deparated by some distance. The demand curve in the first market is given by:
Q1 = 10 − P
and the demand curve in the second market is given by:
Q2 = 70 − 2P
(a) If the monpolist can maintain the separation between the markets, what level of
output should be produced in each market, and what price will prevail in each
market? What are total profits?
(b) How would your answer change if it only cost demanders $2.00 to transport goods
between the two markets? What would be the monopolists new profits?
(c) How would your answer change if transportation costs were zero and the firm was
forced to follow a single price policy?
3