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Drexoogle has developed the first computer (the “earpod”) that fits in one’s ear and functions as a phone, can tell you the time, and will conduct Google searches all in response to a person’s voice commands. Based on market research, Drexoogle has determined that the market demand for this product is Q = 2000 – p, where Q is in thousands of earpods and p is in dollars. Drexoogle’s cost function is 1000Q (there are no fixed costs). First, suppose that Drexoogle can only set a uniform monopoly price for the earpod. (a) What is the price and quantity that maximizes Drexoogle’s economic profits? (b) What are the economic profits that result from monopoly pricing? (c) What is the consumer surplus and deadweight loss that result from monopoly pricing? Now suppose that Drexoogle can perfectly price discriminate; that is, it can identify just by looking at a customer exactly what the maximum that customer would be willing to pay for the earpod. (d) In this case, Drexoogle will not set a uniform price, but rather will set a different price for each customer based on their willingness to pay. What is the quantity of earpods Drexoogle should sell to maximize economic profits? (e) What are the economic profits that result from perfect price discrimination? (f) What is the consumer surplus and deadweight loss that result from perfect price discrimination? Now suppose that Drexoogle cannot perfectly price discriminate, but can identify and separate two different groups of buyers in the market: students and business people (so total quantity Q = Qstudents + Qbusiness). Students have demand that is given by Qstudents = 1500 – 0.8p. Business people have demand that is given by Qbusiness = 500 – 0.2p. (g) What is the price and quantity Drexoogle should set in the student market to maximize profits in that market? What is the price and quantity Drexoogle should set in the business people market to maximize profits in that market? (h) What are the economic profits that result from demographic price discrimination? (i) What is the consumer surplus and deadweight loss that result from demographic price discrimination?
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