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1. Consider a discriminating monopolist who sells designer jeans.
Suppose he has two different designs available: Couture and Derelict. There are two types of consumers: Type I and Type II. Each consumer wishes to buy at most one pair of jeans. Their valuations for each design are given below:
Couture Derelict Type I $360 $120 Type II $160 $80
Suppose the monopolist cannot distinguish across consumer types, so that he will need to worry about self-selection whenever he wants to discriminate. Suppose the objective of the monopolist is to maximize revenues.
Initially, suppose that each type of consumer represents 50% of the population.
a. What is the optimal discrimination policy? Who will buy each design, and at what price?
b. How would your answer change if Type-I consumers represented 25% and Type II represented 75% of the population?
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