(b) Apple Ltd., a profit-maximizing company owned by John, is the only apple pro
ID: 1125212 • Letter: #
Question
(b) Apple Ltd., a profit-maximizing company owned by John, is the only apple producer in town. Today, John has 8 apples and the marginal cost of each apple is $10. There is no fixed cost in John's business. John expects to encounter an average of eight customers per day, each with a reservation price shown in the following table. Each customer will buy at most one apple per day. Customer 2 4 6 Reservation price ($ per apple 40 36 32 28 24 20 16 12 (i) How much should John charge if he must charge a single price to all customers? At this price, how many apples will John sell per day? What will be his economic profit? Briefly explain your answer. (5 marks) (ii) Suppose John is permitted to charge two prices. He knows that customers with a reservation price above $20 never use coupons, whereas those with a reservation price of $20 or below always use them. John decides to distribute coupons to the public free-of- charge. If a customer buys apple without a coupon, this customer has to pay at the list price. Upon presenting a coupon, a customer can buy apple at a discount price. What should be the list price of an apple? What should be the discount price of an apple? Briefly explain your answer. (5 marks)Explanation / Answer
(i)
Since, Marginal Cost = $10, John will set a price consistent with serving only the first four customer. That price is the reservation price of the fourth customer, $28. So, the single price is $28, and Quantity of Apple sold by John = 4. His profit will be : $112-$40= $72 per day.
ii.
The discount price should be $12, and John should sell 3 apples in the market.
Customer Reservation Price ($ per apple) Total Revenue Marginal Revenue 1 40 40 40 2 36 72 32 3 32 96 24 4 28 112 16 5 24 120 8 6 20 120 0 7 16 112 -8 8 12 96 -16Related Questions
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