Question 6

Consider a firm producing branded smartphones. Given that it produces a differentiated product it has market power and faces demand curve for its product.

Assume that the firm has a fixed cost of $2,000,000 and the cost of producing of each additional smartphone is $100.

a) Sketch the marginal cost curve and the average cost curve on the graph above.

b) Write down the formula for the isoprofit curve using the information provided.  Sketch several isoprofit curves on the graph above.

c) Indicate the point on the graph that shows the price the firm would choose to charge and the quantity the firm would sell.  Call it point A. Indicate the corresponding quantity (Q*) and price (P*) on the axes.

d) Given that the firm sells Q* at the price P*, indicate consumer surplus, producer surplus and the dead-weight loss on the graph.  Is quantity Q* Pareto efficient?  Explain.

e) Do producer surplus and the firm’s profit mean the same thing? Explain.

f) Now assume that the firm has sufficient information and so much bargaining power that it could charge each consumer, separately, the maximum they would be willing to pay for the smartphone.  Indicate on the diagram below the number of phones sold, the highest and the lowest price paid by any consumer, the consumer and producer surplus.  Is there dead-weight loss in this case? Explain.