Laura runs a nightclub called 'The 'Gong'.Given the popularity and cache of the club, she has a monopoly position in the market.Males nightclub goers have an individual demand curve of P = 22 - q, whereas female customers each have an individual demand curve of P = 16 - q.Laura has a marginal cost per drink of MC = $2 per unit and no fixed cost.By law, Laura is unable to charge an entrance fee.She can, however, charge different prices for men and women for their drinks (by serving men blue glasses and women customers their drinks in green glasses).If Laura tries to maximize profit, which statement is true?

Question

Quizplus · Accepted Answer

To maximize profit through third-degree price discrimination, Laura should charge different prices to men and women based on their demand curves. For men, the profit-maximizing price is found by setting marginal revenue (MR) equal to marginal cost (MC). The inverse demand curve for men is P = 22 - q. To find MR, we double the slope of the demand curve: MR = 22 - 2q. Setting MR = MC, we get 22 - 2q = 2, solving for q gives q = 10, and substituting back into the demand curve gives P = 12. For women, using the same process with their demand curve P = 16 - q, we get MR = 16 - 2q, and setting MR = MC gives 16 - 2q = 2, solving for q gives q = 7, and substituting back into the demand curve gives P = 9. Charging men $12 and women $9 per drink is an example of third-degree price discrimination, where different prices are charged to different groups based on their willingness to pay.

Laura Runs a Nightclub Called 'The 'Gong