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Problem VII: A monopolist can produce two slightly different versions (qualities) of a product. There are...

Problem VII: A monopolist can produce two slightly different versions (qualities) of a product. There are two types of customers on the market: high types with valuations 250, and 150 respectively for the high and low quality, and low types with valuations 100, respectively 50 for the high and low quality. Assume there is only one consumer of each type. What is the optimal pricing strategy for the monopolist? Price discrimination or just offering a single quality and price? Assume it costs nothing to produce these products and consumers only buy one unit of the good (either high or low quality). Answer: (? = 250)

Please answer this question in complete detail as I don't understand this subject too well. Thank you ?

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Answer #1

First Type of Customer:  

High Type = 250

Low type = 150

Second Type of Customer:  

High Type = 100

Low Type = 50

Cost of Production is Zero.

Price discrimination can be excercise here:

High quality with different prices, then profit = 250+100

= $350

Low quality with different prices, then profit = 150 +50

= 200

If single price is decided equal to 250, then second customer will choose to buy nothing

Price discrimination with high quality good would be profit maximizing strategy.

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