Jeff realizes that there is large demand across NSW & TASMANIA for a low-quality

Question

Jeff realizes that there is large demand across NSW & TASMANIA for a low-quality table wine, with low alcohol content. For simplicity, assume he can produce table wine at a marginal (and average) cost of $0. There seem to be two different types of consumers in the market, but Jeff cannot distinguish between them. table wine addicts p = 50 q table wine and likers p= 40 .05q. Jeff is considering making the following offers. He offers both “packages” and consumers can choose which one they prefer:

• 50 units of table wine at a price of $1250

• 60 units of table wine at a price of $1350

What profits will Jeff make from selling these offers of table wine? What type of pricing behaviour is this called? Using this type of pricing, could Jeff do better and increase his profits? If so, give an example. [3 marks]

Explanation / Answer

P= 50 - q

P = 40 - 0.05q

Adding both, 2P = 90 - 1.05q

50 units of wine = 2P = 90 - 1.05(50)

2P = 90 - 52.5 = 37.5

P = 18.75

Now, 50 units of table wine at P = 18.75 is 50(18.75)=937.5

Profit = 1250 - 937.5 = $312.5

For 60 units of wine, 2P = 90 - 1.05(60) = 90 - 63 = 27

P = 13.5

Now 60 units of table wine at P=13.5 is = 13.5(60) = 810

Profit = 1350 - 810 = $540

This type of pricing behaviour is monopolistic pricing.

Yes, he can do better and increase his profits because in this type of pricing, Jeff can charge the highest possible price to his customer that he is willing to pay.

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