Tim's Tires sells tires under the firm's own brand name and private label tires to discount stores. The tires sold in both sub-markets are identical, and the marginal cost is constant at $15 per tire for both types. The firm has estimated the following demand curves for each of the markets: PB = 70 - 0.0005QB (brand name) Pp = 20 - 0.0002Qp (private label). Quantities are measured in thousands per month and price refers to the wholesale price. By selling the brand name and private label tires at different prices, the firm is using third-degree price discrimination. With price discrimination, the optimal price of brand name tires is 42.5 and the optimal quantity is 55,000. The optimal price of private label tires is 17.5 and the optimal quantity is 12,500. The firm's TOTAL profit is 1,543,750 (assume fixed costs are zero). If the firm cannot price discriminate and must charge a single price in the market, the optimal price is 24.64 and the optimal quantity is 67,500. The firm's total profit in this case is approximately 650,893 (again, assume fixed costs are zero). When price discriminating, the firm charges a higher price in the brand name market because demand for brand name tires is more elastic than demand for private label tires. That is, consumers of private label tires are more sensitive to prices.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Transcribed Image Text:Tim's Tires sells tires under the firm's own brand name and private label tires to discount stores. The tires sold in both sub-markets are identical, and the marginal cost is constant at $15 per tire for both types. The firm has estimated the following demand curves for each of the markets: PB = 70 - 0.0005QB (brand name) Pp = 20 - 0.0002Qp (private label). Quantities are measured in thousands per month and price refers to the wholesale price. By selling the brand name and private label tires at different prices, the firm is using third-degree price discrimination. With price discrimination, the optimal price of brand name tires is 42.5 and the optimal quantity is 55,000. The optimal price of private label tires is 17.5 and the optimal quantity is 12,500. The firm's TOTAL profit is 1,543,750 (assume fixed costs are zero). If the firm cannot price discriminate and must charge a single price in the market, the optimal price is 24.64 and the optimal quantity is 67,500. The firm's total profit in this case is approximately 650,893 (again, assume fixed costs are zero). When price discriminating, the firm charges a higher price in the brand name market because demand for brand name tires is more elastic than demand for private label tires. That is, consumers of private label tires are more sensitive to prices.

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