Question

Second Degree Price Discrimination Q2. HP sells printers to two types of customers with different demands for printer speed. HIGH-type 40 2q where q is the speed (quality) of the printer and users have inverse demand for speed of P(g) 30 3q. There are two LOW-type LOW-type users have inverse demand for speed of P(q) users for every HIGH-type user. The marginal cost of a printer of any speed is zero. HP plans to sell two types type of speed q and price Th will be bought by of printer of different speeds at different prices: one the LOW-types and another type of speed qH and price TH will be bought by the HIGH-types. You are hired to advise on the choices of these variables. (a) Draw the inverse demand curves Calculate the area underneath the inverse demand curve for a given speed of printer s for both types, i.e., calculate SH(q) and Sl(g) (b) Define the two participation constraints ((PCŁ) and (PH)) and the two self-selection constraints ((SSL) and (SSH) Set up the firm's profit maximization problem (i) Explain in words what the constraints (SSi) and (PCi) means. (ii) Explain why if (PC£) and (SS#) hold then (PCH) must also hold. (c) Let's assume that (SSL) holds as well. Rewrite the problem now with only two constraints. Show SH(qHSHL)Si(qi) and T that, based on this problem, HP should set TH (Tb)7S 303g 20, GL50,T 1373 and TH (d) Show that HP should set qH 49 49 (e) Without doing any calculations describe how you would expect the solutions to change if there were 3 LOW-types to every HIGH-type? If there were 2 HIGH-types to every LOW-type?

Answer 1

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