You run a monopoly firm that serves two types of consumer. Individual type-A con

Question

You run a monopoly firm that serves two types of consumer. Individual type-A consumers have a value of 8 for their first unit of your product, a value of 4 for their second unit, and a value of zero for all additional units. Individual type-B consumers have a value of 5 for a single unit of the product and zero for any additional units. There are 3 type-A consumers and 5 type-B consumers. Your marginal cost is zero. a) If your firm can set only a single per-unit price for any units sold, what price should 2. you choose? What is your total profit? If your firm can practice first-degree price discrimination, how many units are sold to each consumer and how much does each consumer pay? What is your total profit? b)

Explanation / Answer

a) If a firm had to chose a single per unit price, it would chose price to be 5 because in that way it won't lose its type B customers and type A customers can find it reasonalre to purchase goods as now price is below their willinglwil to pay.

Bring price 5 for all units,

Profit is maximum where MR = MC ( Marginal revenue = Marginal cost)

Profit = Total revenue - total cost

Total revenue = TR of type A Consumer + TR of type B Consumer

TR of type A consumer = Price × Quantity

= 5*1 =5

But as there are 3 type A consumers , TR = 3*5 = 15

TR of type B consumer = 5*1 = 5

There are 5 type B consumers, so TR = 5*5 = 25

Thus TR = 25+ 15= 40

As Marginal cost = 0

Total cost will be constant

Profit = 15+ 25 = 40

b) For type A consumer -

With first degree price discrimination -

He will buy first unit for 8 and second unit for 4

8+4 = 12 for each consumer

As thete are 3 consumers, 12*3 = 36

For type B consumer,

He will buy first unit for 5 = 1*5 , for each consumer

As there are 5 consumers, 5*5 = 25

Thus total profit = 36 + 25 = 61

We can conclude that, in price discrimination, there is more profit to the monopolist.

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