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University of California, Los Angeles *

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101

Subject

Economics

Date

Feb 20, 2024

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Uploaded by GeneralOryx4061

9. Bob is the only guitar seller (monopolist) on the little island where he lives. His potential customers are either amateurs or musicians. 75% of them are musicians and 25% of them are amateurs. Musicians value good guitars and are willing to pay a lot for them. Bob can make two types of guitars, Basic and Pro. The table below shows how much each type of customer is willing to pay for these guitars and the cost of making them. Cost | Musician Value | Amateur Value Basic | 25 45 35 Pro 35 60 45 Customers only buy from Bob and each person buys at most one guitar. After learning the prices, each person buys the guitar that gives her/him the highest net payoff (value - price), as long as this net payoff is positive. In case of a tie, they buy the Pro version. They also choose to buy over not buy when the net payoff is zero. Bob wants to maximize his profit and he doesn’t have a capacity constraint. Assuming that he wants to sell Pro to musicians and Basic to amateurs, what are the prices py and p, that maximize profits under that assumption?

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