tibie uiat attc price invariably suffer an economic loss? LO8 6. Tots Poses Inc,
ID: 1218666 • Letter: T
Question
tibie uiat attc price invariably suffer an economic loss? LO8 6. Tots Poses Inc, a profit-maximizing business, is the only photography business in town that speci in portraits of small children. Sven, who o runs Tots Poses, expects to encounter eight customers per day, each with a reservation shown in the following table. LO4, LOos, LO6 is the children. Sven, who owns and an average of ation price Reservation price ($/photo) 50 46 42 38 34 30 26 Customer If the marginal cost of each photo is $12, how much will Sven charge if he must charge a single price to all customers and still maximize profits? At this price, how many portraits will Sven pro- duce each day? What will be his economic prohit! a. b. How much consumer surplus is generated each day at this price? What is the number of portraits that maximizes total economic surplus? c.Explanation / Answer
(# of A) * (B)
a. Sven should charge $34 to each customer because marginal revenue ($18) exceeds marginal cost ($12) up to customer E. At this price he will produce 5 protraits.
His economic profit will be ($34 x 5) - ($12 x 5) = $170 - $60 = $110.
b. At this price the consumer surplus will be $40.
A $50 - $ 34 = $16
B $46 - $ 34 = + $12
C $42 - $ 34 = + $8
D $38 - $ 34 = + $4
E $34 - $ 34 = + $0
= $40.
c. He should produce 8 protraits, as thje marginal cost is less than all of the reservation prices, he should satisfy all his customers.
d. In this case, Sven is allowed to perfectly price discriminate. Thus, he will charge each customer his or her own reservation price. He will produce all 8 portraits, because even the customer with the lowest reservation price (H at $22) is willing to pay more than his production cost of $12.
Monopolist profit = SUm of reservation prices - total cost
$ (50+46+42+38+34+30+26+22) - $(12x8) = $192.
e. Because of perfect price discrimination there will be $0 consumer surplus, as all surplus will be taken by the producer.
f. Sven will set list price of the protrait slightly more than $30, so it should be $34. At this list price he will have 5 customers.
For the discounted market he will set the lowest discount price that is $22, where 3 customers will be willing to buy his protrait.
g. In this case the economic profit will be ($34 x 5) + ($22 x 3) - ($12 x 8) = $140 per day.
Consumer surplus will be sum of reservation prices- total revenue
{($50+48+42+38+34)- ($34 x 5)} +{( $30+26+22) -(22 x 3)} = $52 per day.
Customer Reservation Price Toatl revenue(# of A) * (B)
Marginal revenue A 50 50 50 B 46 92 42 C 42 126 34 D 38 152 26 E 34 170 18 F 30 180 10 G 26 182 2 H 22 176 -6Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.