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 discrimination. With price discrimination, the optimal price of brand name tires is ✓. The optimal price of private label tires is ✓. The firm's TOTAL profit is ✓to prices. price ✓and the optimal quantity is ✓and the optimal quantity is ✓ (assume fixed costs are zero). If the firm cannot price discriminate and must charge a single price in the market, the optimal price is and the optimal quantity is ✓. The firm's total profit in this case is approximately (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 ✓ than demand for private label tires. That is, consumers of private label tires are more tires is more

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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$**Title: Understanding Price Discrimination in the Tire Market** **Tim's Tires Demand Curves and Pricing Strategy** Tim's Tires sells tires under the firm's own brand name and private label tires to discount stores. The firm uses price discrimination to maximize profits across these two markets, which have estimated demand curves as follows: - **Brand Name Tires (PB)**: $ P_B = 70 - 0.0005Q_B $ - Where $ P_B $ is the price per tire and $ Q_B $ is the quantity demanded in thousands per month. - **Private Label Tires (PP)**: $ P_P = 20 - 0.0002Q_P $ - Where $ P_P $ is the price per tire and $ Q_P $ is the quantity demanded in thousands per month. **Marginal Cost**: The marginal cost is constant at $15 per tire for both types. **Price Discrimination Strategy** By charging different prices in two segments (brand and private label), the firm uses **third-degree price discrimination**. - **With Price Discrimination**: - Optimal price and quantity calculations for brand name and private label tires need to be computed. - Firm's total profit is calculated by considering different prices for each segment while assuming fixed costs are zero. **Without Price Discrimination**: If the company charges a single price across both markets: - The optimal price and quantity for the combined market are determined. - The firm's total profit in this unified market scenario needs evaluation. The underlying principle is that the firm can charge a higher price in the brand name market because demand for brand name tires is less elastic compared to private label tires. This means consumers of private label tires are more sensitive to price changes. This exercise demonstrates the benefit and application of price discrimination in maximizing firm profits where market conditions allow.$

Transcribed Image Text:**Title: Understanding Price Discrimination in the Tire Market** **Tim's Tires Demand Curves and Pricing Strategy** Tim's Tires sells tires under the firm's own brand name and private label tires to discount stores. The firm uses price discrimination to maximize profits across these two markets, which have estimated demand curves as follows: - **Brand Name Tires (PB)**: $ P_B = 70 - 0.0005Q_B $ - Where $ P_B $ is the price per tire and $ Q_B $ is the quantity demanded in thousands per month. - **Private Label Tires (PP)**: $ P_P = 20 - 0.0002Q_P $ - Where $ P_P $ is the price per tire and $ Q_P $ is the quantity demanded in thousands per month. **Marginal Cost**: The marginal cost is constant at $15 per tire for both types. **Price Discrimination Strategy** By charging different prices in two segments (brand and private label), the firm uses **third-degree price discrimination**. - **With Price Discrimination**: - Optimal price and quantity calculations for brand name and private label tires need to be computed. - Firm's total profit is calculated by considering different prices for each segment while assuming fixed costs are zero. **Without Price Discrimination**: If the company charges a single price across both markets: - The optimal price and quantity for the combined market are determined. - The firm's total profit in this unified market scenario needs evaluation. The underlying principle is that the firm can charge a higher price in the brand name market because demand for brand name tires is less elastic compared to private label tires. This means consumers of private label tires are more sensitive to price changes. This exercise demonstrates the benefit and application of price discrimination in maximizing firm profits where market conditions allow.

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The addition to the overall cost of production that occurs each time a company creates an extra unit of output for the market is known as the marginal cost in economics. By dividing the difference between the total cost change and the change in output level, it may be mathematically determined.

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