Suppose a firm has two types of customers but cannot tell which type of buyer a customer is before a purchase is made. One group has an inverse demand of P = 100 - 10Q; another has an inverse demand curve of P = 110 - 22.5Q. The marginal cost of production is constant at $20. If the firm wanted to use quantity discounting, it should charge _____ per unit for any quantity purchased or _____ or more units.
A) $65; $60 for 4
B) $50; $40 for 8
C) $25; $20 for 2
D) $85; $75 for 6

Question

Quizplus · Accepted Answer

The correct answer is A because the firm should charge $65 per unit for any quantity purchased or $60 for 4 or more units. This is because the marginal cost of production is $20, and the firm wants to maximize its profit. By charging $65 per unit, the firm will sell 5 units to the first group of customers and 2 units to the second group of customers. This will give the firm a total profit of $225. If the firm charges $60 per unit for 4 or more units, it will sell 6 units to the first group of customers and 3 units to the second group of customers. This will give the firm a total profit of $240. Therefore, the firm should charge $65 per unit for any quantity purchased or $60 for 4 or more units.

Suppose a Firm Has Two Types of Customers but Cannot