e second-degree price discrimination o first-degree price discrimination QUESTIO
ID: 1113394 • Letter: E
Question
e second-degree price discrimination o first-degree price discrimination QUESTION 6 Scenario: Tobac Co. is a monopolist in the cigarette market in Nicotiana Republic, where the U.S. dollar is used as the official currency. The firm has a constant marginal cost of $2.00 per pack and the fixed cost is $20 million. Through market research, the firm has found that there are two types of customer, Type 1 and Type 2. The demand curves of the two types of customers, and the total market demand curve, along with respective marginal revenue curves, are shown in the following figure Price S per pack) 14 Type 1 Consumers Demand 12 10 2 MC MR, D, 4850 Quantity mélions of packs) 10 20 24 30 40 Click Save and Submit to save and submit. Click Save All Answers to save all answers.Explanation / Answer
Question 6
A monopolist maximizes profit when it produce that level of output corresponding to which marginal revenue equals marginal cost.
It has been provided that firm successfully carry out the group price discrimination.
This means it will charge different price from each group.
Graph for Type 1 consumers shows that MR curve is intersecting MC curve corresponding to output of 20 million packs.
The price corresponding to this quantity (as per the demand curve) is $7 per pack.
So, firm will charge $7 per pack from Type 1 consumers.
Graph for Type 2 consumers shows that MR curve is intersecting MC curve corresponding to output of 60 million packs.
The price corresponding to this quantity (as per the demand curve) is $5 per pack.
So, firm will charge $5 per pack from Type 2 consumers.
Thus,
The firm would charge Type 1 consumers $7 per pack and Type 2 consumers $5 per pack.
The correct answer is the option (1).
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