Suppose Island Bikes, a profit-maximizing firm, is the only bike rental company in a small resort town. The marginal cost to Island Bikes of renting out a bike is $3, and Island Bikes has no fixed costs. Each day Island Bikes has six potential customers, whose reservations prices are listed in the table.
$$\begin{array} { | c | c | }
\hline \text { Custamer } & \begin{array} { c }
\text { Reservetion Price } \
\text { (\$ /Rental) }
\end{array} \
\hline \mathrm { A } & 22 \
\hline \mathrm { B } & 16 \
\hline \mathrm { C } & 12 \
\hline \mathrm { D } & \mathrm { 8 } \
\hline \mathrm { E } & 6 \
\hline \mathrm { F } & 4 \
\hline
\end{array}$$ Suppose Island Bikes knows that customers whose reservation prices are at least $10 always rent bikes before noon, while those whose reservation prices are below $10 never do so. If Island Bikes charges a different price in the morning and in the afternoon, then what will be its daily economic profit?
A)$27
B)$32
C)$33
D)$39

Question

Suppose Island Bikes, a profit-maximizing firm, is the only bike rental company in a small resort town. The marginal cost to Island Bikes of renting out a bike is $3, and Island Bikes has no fixed costs. Each day Island Bikes has six potential customers, whose reservations prices are listed in the table.  
$$\begin{array} { | c | c | } 
\hline \text { Custamer } & \begin{array} { c } 
\text { Reservetion Price } \
\text { (\$ /Rental) }
\end{array} \
\hline \mathrm { A } & 22 \
\hline \mathrm { B } & 16 \
\hline \mathrm { C } & 12 \
\hline \mathrm { D } & \mathrm { 8 } \
\hline \mathrm { E } & 6 \
\hline \mathrm { F } & 4 \
\hline
\end{array}$$ Suppose Island Bikes knows that customers whose reservation prices are at least $10 always rent bikes before noon, while those whose reservation prices are below $10 never do so. If Island Bikes charges a different price in the morning and in the afternoon, then what will be its daily economic profit?
A)$27
B)$32
C)$33
D)$39

Quizplus · Accepted Answer

Island Bikes can maximize profit by price discrimination, charging more in the morning when demand is inelastic (customers A, B, and C with reservation prices of $22, $16, and $12, respectively) and less in the afternoon for the more price-sensitive customers (D and E with reservation prices of $8 and $6, respectively). Customer F won't rent a bike since their reservation price is below the marginal cost. In the morning, charge $12 (the reservation price of the most price-sensitive morning customer, C), earning $(12-3) * 3 = $27 profit. In the afternoon, charge $6 (the reservation price of the most price-sensitive afternoon customer, E), earning $(6-3) * 2 = $6 profit. Total daily economic profit is $27 + $6 = $33.

Suppose Island Bikes, a Profit-Maximizing Firm, Is the Only Bike