How much profit does the firm collect with the prices set
Course:- Business Economics
Reference No.:- EM13851021

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Suppose there are two types of customers for a cell phone service: undergraduates (U) and grad Students (G). The aggregate (inverse) demand curve for undergraduates is PU = 100 − 0.25QU and the aggregate (inverse) demand curve for the graduate students is PG = 50 − QG. The firm providing the cell phone service is a monopolist with a cost function characterized by C(Q) = 4Q + 10.

(a) Suppose the firm is restricted to set a single price for both types of customers (i.e., no price discrimination). What price does the firm set? How much profit does the firm collect?

(b) How much consumer surplus is generated at the price identified in (a)?

(c) Suppose the firm sets a price of $48 for a quantity smaller or equal than 200 minutes and a price of $46 for a quantity beyond the 200th minute. In this situation, what quantity should undergraduates choose? And what quantity should graduate students choose?

(d) What consumer surplus will each customer type enjoy at the prices set in (c)?

(e) How much profit does the firm collect with the prices set in (c)?

(f) Why would a firm choose a second-degree price discrimination strategy rather than a first- degree price discrimination strategy? (You only need to provide one reason)

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