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. To maximize profit a price discriminating firm should A)produce the output at which total marginal revenue equals marginal cost. B)allocate the optimal output so the elasticity is the same in each market. C)allocate the output so that marginal revenue is the same in each market. D)both a and c E)all of the above

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Quizplus · Accepted Answer

The optimal pricing plan for the firm is to charge a two-part pricing, i.e., a lump-sum fee or a fixed fee plus a per-unit charge. In this case, the firm can maximize its profits by setting the per-unit charge equal to marginal cost in each market and charging a fixed fee that captures the maximum amount each group of buyers is willing to pay. This pricing strategy will enable the firm to extract the maximum consumer surplus from both groups of buyers, while still covering its fixed costs and earning a profit. To implement this pricing plan, the firm should allocate the optimal output such that total marginal revenue equals marginal cost, as well as allocate the output so that marginal revenue is the same in each market. Therefore, the best choice is D, both a and c.

A Firm Sells Its Product to Two Groups of Buyers