2. Jack is the owner of the only local bar in a small town. He sells whiskey in

Question

2. Jack is the owner of the only local bar in a small town. He sells whiskey in one-ounce glasses. For simplicity, let's assume it doesn't cost Jack anything to run this business. There are two consumers, Adam and Burt who are twin brothers. Adam's demand function is yA 10-p, and Burt's demand function is Y.-8-p (price is measured in dollars and quantity is measured in ounces) Jack knows their demand functions but the problem is that he cannt e them apart since they look exactly the same to him. To increase his profits, Jack offers the following two options that his customers can choose from: (1) You can pay ST1 up front and drink as much as you want; or (2) Pay ST2 up front and the price per ounce of whiskey will be Sp. 21. (2 points) If p = 2, what is the maximal T2 that Jack can charge so that Burt 2.2. (3 points) Given your answer of (2.1), what is the maximal Ti that Jack can is willing to come to the bar? charge so that Adam will choose the first pricing scheme?

Explanation / Answer

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Over here we have two customers for Jack- Burt. However both are similar looking customers, but the demand function for both of them is totally different.

Demand function for Adam-

yA=10-p

Demand function for Burt-

yB=8-p

Answer to 2.1

If p=2

Then as per option 1 the demand would be:-

Yb= 8-2

yB=6 ounces

So Burt can only drink 6 ounces,

Now to force him to choose option b Jack will have to charge less than T1,

$p= 2 and the demand is 6 glasses = $12, hence T1 has to be less than at least $12

Hence T2= 1<T2<2

.

Answer to 2.2

Maximal that Jack can charge =

yA= 10-2= 8 ounces

Now going by option 2 Adam will spend atleast $2*8= $16

Hence the maximum Adam can charge for T1 = $16 which will always be less than T2.

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