You are the manager of a monopoly. A typical consumer's inverse demand function for your firm's product is P = 250- 4Q, and your
cost function is TC = 10Q. A. MC is fixed and is equal to $10 (MC=AC=S). MR=250-8Q. (P=price, Q=quantity of output, TC=total cost, MC=marginal cost, MR=marginal revenue, S=supply)
1)What price the company should choose to get maximum profit if the company will use ordinary pricing strategy?
2)Now suppose the company is thinking about using price discrimination for lower income group of customers. If the company will offer discount of $30 in price to the lower income groups how much additional profit will the company earn? Illustrate graphically.
3)Explain the conditions needed to apply the price discrimination strategy?
(1) 240-8Q=0240−8Q=0 (2) 225 (3) it is very necessary that the direct elasticity of demand for a product at a price from several buyers be different significantly; so that customers are easily known, that further goods resale by buyers is not possible
Step-by-step explanation:
Solution
Given that:
(1) TR=∫MR=250Q−4Q
Pr=TR-TC=250Q-4Q² - 10Q=240Q−4Q²
Thus,
Pr =240−8Q
240-8Q=0240−8Q=0
(2) Q=30
Now,
p=250-4 * 30=130
p=100
so.
100=250−4Q
Q=37.5
Pr=240×37.5−4×37.5²
=3375
Hence,
ΔPr=3600−3375=225
(3) For the execution of price discrimination by a monopolist, it is very important that the direct elasticity of demand for a product at a price from different buyers be remarkably different; so that customers are easily known, that further goods resale by buyers is not done.
