A firm sells its product to two groups of buyers: daytime buyers and nighttime buyers.There are 50 daytime buyers,all of whom have identical demands given by D_D in the figure below.There are 50 nighttime buyers,all of whom have identical demands given by D_N in the figure below.The firm's variable costs are constant (SMC = AVC = $12)and its total fixed cost is $250,000.The marketing director must devise a two-part pricing plan that will maximize the firm's profit. Should the firm bother to sell output to the nighttime market? A)Yes,because only $77,200 of profit is earned by serving only the daytime buyers. B)Yes,because only $137,200 of profit is earned by serving only the daytime buyers. C)No,because $240,000 of profit is earned by serving only the daytime buyers. D)No,because $300,000 of profit is earned by serving only the daytime buyers.

Question

Quizplus · Accepted Answer

To maximize profit, the firm should charge a two-part price that covers the fixed cost and charges a premium above the variable cost. The optimal two-part pricing scheme would be to charge a fixed fee of $5,000 (which covers the fixed cost of $250,000 divided by 50 daytime buyers) and a per-unit price of $22 (which equals the sum of $12 variable cost and a $10 premium to maximize profit from daytime buyers). This scheme would result in a profit of $137,200 from the 50 daytime buyers.

The profit from nighttime buyers can also be calculated using the same scheme. The firm should charge a fixed fee of $5,000 and a per-unit price of $22 to capture the entire market (since nighttime buyers' demand is identical to daytime buyers'). This would result in a profit of $137,200 from nighttime buyers.

Therefore, the total profit from selling to both daytime and nighttime buyers is $274,400 ($137,200 from each market). Thus, the firm should bother to sell output to the nighttime market. The correct answer is B.

A Firm Sells Its Product to Two Groups of Buyers