ECO550 Week 6 Discussion 1 and 2

Discussion 1

A monopolist has two types of customers. There are 100 of type A, who will each pay up to $10 for a single unit of the good, and 50 of type B, who will each pay up to $8. Neither is willing to purchase additional units at any price. If it must charge a uniform price , find that price.

Assume that spending $80 on advertising will attract 100 more Type B customers. Should the monopolist advertise? If so, what will happen to price? Explain the role of advertising, if any, in this case.

Discussion 2

The individual demand for a slice of pizza is given by QD = 6 - P. Assume the marginal cost of a slice of pizza is constant at $1.00 and the marginal revenue (MR) function is 6 - 2Q.

a. What is the profit-maximizing price and quantity if the seller sells all slices at a single price?

b. Suppose that the seller decides to sell pizza at cost and charge a fixed price for this option. What quantity will a customer demand at the market price? What is the maximum fixed price the seller can charge for this option?

Discuss the value of this seller's pricing strategy.