The following shows the demands and marginal revenue in two markets, 1 and 2, for a price discriminating firm along with total marginal revenue, MRT, and marginal cost MC:
Compare the demand conditions in each market; i.e. how do the two markets differ in their demand for the firm’s product?
a. Market 1 has less demand than market 2. 1 is low demanders, 2 is high demanders.
b. Market 1 has more demand than market 2. 1 is high demanders, 2 is low demanders.
c. Both markets have equivalent demand since MC is constant in both markets.
How much total output should the firm produce (for both markets combined)? (It would be easiest to copy and paste the picture above and draw directly on the picture using Insert, Shapes to do the next few questions.)
a. 250 units
b. 225 units
c. 425 units
d. 75 units
How should that output be allocated between markets 1 and 2?
a. 225 units in market 1; 250 units in market 2
b. 150 units in market 1; ≈310 units in market 2
c. 125 units in market 1; ≈180 units in market 2
d. 75 units in market 1; 150 units in market 2
What price should the firm charge in each market?
a. $20 in both markets
b. ≈$27.50 in market 1; $35 in market 2
c. ≈$22.50 in market 1; ≈$32 in market 2
d. ≈$27.50 in both markets
On Amazon.com, there are three versions of Keynes’ famous General Theory: a hardcover for $19.79, paperback for $8.82, and a Kindle version for $2.99. There is not much difference in the cost of production between hardcover and paperback books (though there likely is for the Kindle e-book version), but hardcover books do tend to be published earlier than paperback versions of the same book. How do you explain the wide variety of prices for basically the same book?
a. Price discrimination between demanders. Kindle owners are high demanders since the format is not compatible with anything but Kindles. Hardcover buyers are low demanders since there aren’t many who would want a hardcover when paperbacks or e-books are cheaper. There are more paperback buyers, so they pay a price between these two extremes.
b. Even though the cost of production between hardcover and paperback is small, demand is highly elastic, so this small cost difference results in a large price difference. The cost difference between paperback and e-books is larger, resulting in the smaller gap between paperback and e-book prices.
c. The market for hardcover books has more demand and less supply than the market for paperbacks, which likewise has more demand and less supply than the market for e-books. The equilibrium prices all reflect these differences.
d. Price discrimination between demanders. High demanders are willing to pay a high price for a hardcover that is published early. Low demanders aren’t, and are only willing to pay low price for later paperback. It is much cheaper to produce the Kindle version (MC probably close to zero), and not many buyers (people with Kindles, less D) lead to lowest price.