1. If the firm is able to segment the market based on the residences of its cust

Question

1. If the firm is able to segment the market based on the residences of its customers, it will earn producer surplus of:

A. $1,800.50

B. $4,025

C. $2,680

D. $2,012.50

2. If the firm is unable to practice third-degree price discrimination and must charge a single-profit maximizing price, it will earn producer surplus of approximately (nearest approximation):

A. $3,521.05

B. $2,990

C. $980

D. $4,555.20

Local Residents Nonlocal Residents Price (S) Price (S) 210- 190 170 150 130 110 90 70 50 30 100 90 80 70 60- 40 20 10 MR MC MC 6555 30 10 20 30 40 50 60 70 80 90 100 Quantity 10 20 40 Quantity

Explanation / Answer

1.)

Producer Surplus for Locals = (P-MC)*Q = (55-10)*45 = 2025

Producer Surplus for Locals = (P-MC)*Q = (110-10)*20 = 2000

Total Surplus = $4025

2.) Can undertake 3rd degree price discrimination.

So we will calculate total demand at a given price

Inverse Demand Curve of Locals: Q = 100 - P

Inverse Demand Curve of Non- Locals: Q = 42 - P/5

Total Demand : Q = 142 - 6/5P

P = (142-Q)/(6/5)

Profit = (710 - 5Q)/6*Q - 10Q

For Profit maximization, we partially differentiate with respect to Q

MR = MC

710/6 - 5Q/3 = 10

Q = 65

Price = (142 - 65)/(6/5) = 77*5/6 = 64.167

Producer Surplus = (64.167 - 10)*65 = $3,521

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