39. In class we’ve discussed the fact that the baseline models we’ve constructed can be extended to incorporate more advanced techniques. Let’s look at a
39. In class we’ve discussed the fact that the baseline models we’ve constructed can be extended to incorporate more advanced techniques. Let’s look at a speciﬁc extension that incorporates the
mncept of price discrimination. In particular, assume that a ﬁrm with constant marginal costs of $2 has two types of customers. The ﬁrst type has a market demand of 101(1)) = 20 — p . The second
type is more price-sensitive and has a market demand of .1")2 (p) = 18 — p . :1. Assume the ﬁrm can only set a single price. For instance, when an individual shows up to
purchase a good the ﬁrm cannot determine which type of consumer she is. 1 is the maximal proﬁt the ﬁrm can achieve? nt: This is pretty much a standard market power
model where you need to solve for the market demand, proﬁtvmaximize, then determine if the firm would sell to each customer type. 13. Now assume the ﬁrm can set a different price in each market. For instance, the ﬁrm can offer senior citizen discounts. If the ﬁrm proﬁt—maximizes in market 1 and also proﬁtwmaximizes in market 2, what prices will it set in each market? c. How much extra proﬁt will the ﬁrm receive by price-discriminating in this manner?
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