Question

Your product has two types of buyers, some who value it at $10 and others who value it at $6. If your marginal cost is $2 and you cannot price discriminate, you should offer a price of $6 unless the share of customers who value your product at $10 is at least

a. 67%

b. 60%

c. 40%

d. 50%

Answer 1

Option d. 50%

Explanation:

*If the firm cannot price discriminate, it should offer the product at high price based on relative operating profits.The relative operating profits should indicate the optimal proportion of each segment of buyers.

*Share of customers at price of $10=operating profit at price of $6/operating profit at price of $10

operating profit=price -marginal cost=p-mc

share of customer at price of $10=(6-2)/(10-2)

=4/8×100%

=50%

If consumers who value the product at $10 are at least 50%, then the price should be used instead of $6.