A sand and gravel company sells pea gravel. It faces two types of customers with the following inverse demand curves:
Type A: P = 3.5 - 0.002Q
Type B: P = 3 - 0.001Q
where Q measures bags of pea gravel and P is the price per bag. The marginal cost is $0.50.
a. Suppose the business wants to use discounting to price-discriminate. Calculate the price per bag and the price per bag with the quantity discount. What minimum quantity will the firm set for the quantity discount?
b. How much consumer surplus do Type A buyers receive from the regular price and the quantity-discount price?
c. How much consumer surplus do Type B buyers receive from the regular price and the quantity-discount price?
d. Based on your answers to parts b and c, are the prices incentive-compatible?

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The Answer of A sand and gravel company sells pea gravel. It faces two types of customers with the following inverse demand curves:
Type A: P = 3.5 - 0.002Q
Type B: P = 3 - 0.001Q
where Q measures bags of pea gravel and P is the price per bag. The marginal cost is $0.50.
a. Suppose the business wants to use discounting to price-discriminate. Calculate the price per bag and the price per bag with the quantity discount. What minimum quantity will the firm set for the quantity discount?
b. How much consumer surplus do Type A buyers receive from the regular price and the quantity-discount price?
c. How much consumer surplus do Type B buyers receive from the regular price and the quantity-discount price?
d. Based on your answers to parts b and c, are the prices incentive-compatible?

A Sand and Gravel Company Sells Pea Gravel