A monopolist sells a product with zero marginal cost of production. She has two
ID: 2800642 • Letter: A
Question
A monopolist sells a product with zero marginal cost of production. She has two types of customers: group 1 are students (with a student ID) and group 2 are non-students. The individual demand of customers in group 1 is q1=10p while the individual demand of customers in group 2 is q2=15p. The nature of the product ensures that there can be no arbitrage. Which of the following statements is true? A. The optimal price per unit for group 1 is p1=$5. B. The optimal price per unit for group 2 is p2=$7.5 C. This is an example of 3rd degree price discrimination. D. All of the above. E. Only (a) and (c).
Explanation / Answer
D. All of the above.
Since for group 1, Quantity is function of price so maximum profit will be pricing product at $ 5
Price
Quantity = 10-p
Profit = price* quantity (since zero marginal cost)
10
0
0
9
1
9
8
2
16
7
3
21
6
4
24
5
5
25
Since for group 2, Quantity is function of price so maximum profit will be pricing product at $ 7.5
Price
Quantity = 15-p
Profit = price* quantity (since zero marginal cost)
15
0
0
14
1
14
13
2
26
12
3
36
11
4
44
10
5
50
9
6
54
8
7
56
7.5
7.5
56.25
7
7
49
: - This is surely an example of 3rd degree price discrimination, since there are two different group of consumers and different prices are charged according to their paying capacity
Price
Quantity = 10-p
Profit = price* quantity (since zero marginal cost)
10
0
0
9
1
9
8
2
16
7
3
21
6
4
24
5
5
25