2) Assume that there are two types of consumers for your product: high demand (type H) and low demand (type L). Specifically, for a given level of quality, type H consumers are always willing to pay more. There are two qualities for which you can produce a good, bad (B) and good (G). It costs $3 to make a B good and $5 to make a G good. Consumers will only buy one good (type B or G). The following chart lists valuations for each good for each type of consumer: G В 10 6. L 5 4 Assume that consumer type is not observable, that first degree price discrimination is impossible, and there are 20 low type and 10 high type consumers. a. What is the optimal price and profits if you only sell the type G good? b. What are the optimal prices and profits if you sell both goods? What is your profit? Assume you can degrade the value to the bad version by $1 to both the high and low value customer. Assume you save $2 on production costs by doing this. Assume that you price optimally in С. that case, are you willing to service/sell to both markets now?

2) Assume that there are two types of consumers for your product: high demand (type H) and low demand (type L). Specifically, for a given level of quality, type H consumers are always willing to pay more. There are two qualities for which you can produce a good, bad (B) and good (G). It costs $3 to make a B good and $5 to make a G good. Consumers will only buy one good (type B or G). The following chart lists valuations for each good for each type of consumer: G В 10 6. L 5 4 Assume that consumer type is not observable, that first degree price discrimination is impossible, and there are 20 low type and 10 high type consumers. a. What is the optimal price and profits if you only sell the type G good? b. What are the optimal prices and profits if you sell both goods? What is your profit? Assume you can degrade the value to the bad version by $1 to both the high and low value customer. Assume you save $2 on production costs by doing this. Assume that you price optimally in С. that case, are you willing to service/sell to both markets now?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

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2)
Assume that there are two types of consumers for your product: high demand (type H) and low demand
(type L). Specifically, for a given level of quality, type H consumers are always willing to pay more. There are
two qualities for which you can produce a good, bad (B) and good (G). It costs $3 to make a B good and $5 to
make a G good. Consumers will only buy one good (type B or G). The following chart lists valuations for each
good for each type of consumer:
В
H
10
L
5
4
Assume that consumer type is not observable, that first degree price discrimination is impossible, and there
are 20 low type and 10 high type consumers.
a.
What is the optimal price and profits if you only sell the type G good?
b.
What are the optimal prices and profits if you sell both goods? What is your profit?
Assume you can degrade the value
customer. Assume you save $2 on production costs by doing this. Assume that you price optimally in
С.
the bad version by
to both the high and low value
that case, are you willing to service/sell to both markets now?

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