PQR Ltd is the sole supplier of electricity in your country. It supplies
electricity to two
separate consumers, namely (i) industrial and commercial users and (ii)
domestic users. The company is able to charge different prices or tariffs to
these two consumers. Suppose the PQR Ltd’s total cost of producing
electricity is given by the following cost function:
C = 50 + 20Q
Where C = total cost
Q = total output of electricity produced
The demand functions for the two consumers is given as follows:
P1 = 80 – 5Q1
P2 = 180 – 20Q2
Where P1 = Tariff charged to commercial users
Q1 = Output sold to commercial users
P2 = Tariff charged to domestic users
Q2 = Output sold to domestic users.
a) The output produced and how much of this output will be sold in each
market if PQR Ltd is
to maximize profits?
b) At what price will the outputs in each market be sold?
c) The price elasticities of demand for the two markets (at equilibrium price
d) Comment on the relationship between the price elasticity of demand and the
level of prices
in decision- making.
e) Under what circumstances might it be possible and profitable for a
monopolist to charge different prices for his product in different markets?