Problem 2
BH is an online seller of DVD’s. To buy a DVD from a BH, a customer must pay a monthly membership fee, plus a price for every
DVD bought (this is a two-part tariff pricing scheme). After some market research, BH discovers that the DVD market is separated
into two segments; movie connoisseurs and movie amateurs. Movie connoisseurs each have demand Qc – 12-P and movie amateurs
each have demand QA – 10 -2P where P is the price of a DVD. Qc is the number of DVDs demanded by connoisseurs, and QA is the
number of DVDs demanded by amateurs. There are 100 connoisseurs and 100 amateurs. Because all the transactions are done on the
Internet, BH cannot tell the difference between movie connoisseurs and movie amateurs and must charge both groups the same price.
The marginal cost of a DVD is $0, but BH has a fixed cost of $2,000.
a.
Using the blue line (circle symbols), graph an individual movie connoisseur’s demand curve (Qc =12-P).
Using the purple
line (diamond symbols), graph an individual movie amateur’s demand curve (Qa = 10 – 2P) on a price –y axis and demand as
x-axis each with a range of 0-12. Price =y-axis 0 to 12 and Quantity x- axis =0 to 12.
b.
Suppose that BH wants to sell exclusively to movie connoisseurs. To maximize profit, BH should charge a membership fee of
___________($0, $25, $30,$47, $60) per member and a price of _____________($0, $1, $2, $3, $6, $10) per DVD.
c.
If BH sells exclusively to movie connoisseurs, its total profits will be ___________($0, $3,100, $5,100, $5,200, $7,200).
d.
BH has heard that selling to both market segments may increase its profits. To include both consumer groups in the market,
its sets a price of $1 per DVD and a membership fee of $16.
e.
Using a red line cross symbol, place a horizontal line at the price per DVD that BH will charge when it sells to both movie
connoisseurs and movie amateurs. Using a triangle dash symbol shade the area that represents BH membership fee when it
sells to both market segments.
f.
If BH sells to both movie connoisseurs and movie amateurs, its total profits will be ($3,100, $3,075, $3,000, $5,000, $5,100,
$5,075). Is selling to both market segments profit maximizing?_______(Yes, No)
Problem 3 For this example refer to graphs as show left and right.
WSP is a profit maximizing publisher of Shakespeare works. They are the only publisher of such works and are a monopolist. There
are two types of consumers who buy these books; 1) students and 2) general public. Students who need the works for classes have less
elastic demand than the general public does.
On the left graph you can see students demand for the books (purple line labeled Ds) and marginal revenue (purple line labeled MRs),
and the general public’s demand (green line labeled Dg) and marginal revenue (green line labeled MRg). You can also see WSP’s
marginal cost per book (MC is a constant $2 per book).
The graphs on the right show the total demand of WSP’s Shakespeare books (blue line labeled Dt) and the total marginal revenue
(blue line labeled MRt) as well as MC (which remains a constant $2 per book).
If WSP decides to set one price for all its Shakespeare books, it will sell a total of ________(8,000, 3,000, 16,000, 5,000, 10,000)
books at a price of ______($6.0, $2.0, $8.0, $7.0 , $5.0) per book. Student will buy ___(5K, 3K, 6K, 2K, 8K,0) books and the general
public will buy _________(0, 2K, 3K, 6K, 5K, 8K) books.
With the same price in both segments, the marginal revenue in the students market segment is ______($0, $1, $2, $4, $-2), which is
_______( (equal to, less than, greater than) marginal cost. The marginal revenue in the general public market segment
is____________ ($4, $0, $6, $2, -$2) which is (equal to, less than, greater than) marginal cost.
With the same price in both market segments, WSP’s profits will be ______($32K, $18K, $22K, $24K, $20K).
Suppose that WSP finds a way to price discriminate and set a different price for its books in each market segment. WSP will set a price
of ______($6.0, $2.0, $8.0, $7.0 , $5.0) in the student market segment and sell________( 0, 2K, 3K
5K, 6K, 8K) books to students.
WSP will set a price of __________($6.0, $2.0, $8.0, $7.0 , $5.0) in the general public market segments and sell______________(0,
2K, 3K
5K, 6K, 8K) books to the general public.
When WSP charges separate prices to the two consumer groups, its profits are ______($18K, 28K, 24K, 34K, 22K)
If WSP price discriminates in this way it is practicing __________(1
st
degree, 2
nd
degree, 3
rd
degree, two part tariff) price discrimination.
The result is that students pay _______(more, less, the same) per book with price discrimination and are therefore ___________(better
off, neither better off nor worse off, worse off), than they were under uniform pricing ( one price for both market segments). The
general public market segment pays __________(less, more same) per book with price discrimination and is therefore___________
better off, worse off, neither better off nor worse off than it was under uniform pricing.