Scenario: Tobac Co. is a monopolist in cigarette market in Nicotiana Republic, where the U.S. dollar is used as the official currency. The firm has a constant marginal cost of $2.00 per pack and the fixed cost is $20 million. Through market research, the firm has found that there are two types of customer, Type 1 and Type 2. The demand curves of the two types of customers, and the total market demand curve, along with respective marginal revenue curves, are shown in the following figure.

-Refer to the scenario above.If Tobac Co.could not carry out price discrimination,the firm would sell ________ as it would under the third-degree price discrimination.

Question

Scenario: Tobac Co. is a monopolist in cigarette market in Nicotiana Republic, where the U.S. dollar is used as the official currency. The firm has a constant marginal cost of $2.00 per pack and the fixed cost is $20 million. Through market research, the firm has found that there are two types of customer, Type 1 and Type 2. The demand curves of the two types of customers, and the total market demand curve, along with respective marginal revenue curves, are shown in the following figure.

-Refer to the scenario above.If Tobac Co.could not carry out price discrimination,the firm would sell ________ as it would under the third-degree price discrimination.

Quizplus · Accepted Answer

Without price discrimination, Tobac Co. would have to charge the same price to both Type 1 and Type 2 customers, which would be the price at which the total market demand curve intersects with the marginal cost curve, which is $6.00. At this price, the total market demand is 30 million packs, which is the quantity Tobac Co. would sell. With third-degree price discrimination, Tobac Co. can charge higher prices to Type 1 customers, who have a less elastic demand curve, and lower prices to Type 2 customers, who have a more elastic demand curve. This allows Tobac Co. to increase its profits by selling more to Type 2 customers at a lower price, while still maintaining its sales and profits from Type 1 customers. Therefore, Tobac Co. would sell as many packs as it would under the third-degree price discrimination, which is also 30 million packs.