Numerical Questions on Price Discrimination

1. A firm owns a mineral spring in an area where no other source of water is

available. It can produce indefinitely once certain pipes are installed and have the
possibility of selling mineral water to the domestic and foreign markets. The
domestic and foreign demands are Qd = 21- 0.1Pd and Qf = 50 - 0.4Pf respectively.
The total cost of the plant installation is TC = 2000 + 10Q where Q = Q d + Qf . What
prices will the producer charge in order to maximize profit :

a. with discrimination between markets?

b. without discrimination?

c. Which policy is better from the perspective of the firm?

2. Company X manufactures a certain product that can be sold directly to retail

outlets or to company Y for further processing and eventually sold by them as
completely different products. The demand functions for each of these markets
are

Retail outlets: P1 = 60 – 2Q1

Company Y: P2 = 40 – Q2

The total cost function of company X is TC = 10 +8Q where, Q = Q 1 + Q2 .

a. What are the profit maximizing prices and output levels for the product in the
two markets?

b. What is the profit of company X if it is able to charge different prices in the two
markets?

c. What would be the price and output of this company without price
discrimination?

d. Which one of the two policies of discrimination and non-discrimination is better

for the firm in economic point of view?
3. Suppose a discriminating monopolist is selling a product in two separate
markets in which demand functions are P1 = 12 – Q1 and P2 = 20 – Q2 . The cost
function of the monopolist is C = 3 + 2Q. As an economic advisor, you are asked to
determine the price to be charged in the two markets and amount of output to be
sold in each market so that profits are maximized. You are also asked to calculate
the total profits to be made from the strategy. What advise will you give
regarding price discrimination and non-discrimination?

4. A telephone company operated by the private sector has isolated three distinct
demands for its service:

Weekdays: Q1 = 90 – 0.5P1

Holidays: Q2 = 35 – 0.25P2

Nights: Q3 = 30 – 0.2P3

The total cost function is TC = 25 + 20Q where, Q = Q 1 + Q2 +Q3 .

Find the profit maximizing prices and output levels of the company.

5. Consider that a monopolist sells in two markets and has constant marginal cost
equal to $2 per unit. The demand equations for two markets are:

PI = 14 -2QI and, P2 = 10 –Q2

a) Find profit maximizing prices, quantities and combined profit from both
markets under the condition of price discrimination.

b) What are the profit maximizing price, quantity and total profit without price
discrimination?

6. Suppose that Pokhara University wants to reduce the athletic department’s

operating deficit and increase student attendance at home football games. To
achieve these objectives, a new two-tier pricing structure for season football
tickets is being considered. A market survey conducted by Pokhara University
suggests the following market demand equations:
Public demand: Qp = 90000 – 200Pp
Student demand: Qs = 200000 – 800Ps
During recent years, the football program has run on an operating budget of
Rs.1.5 million per year. The budget covers fixed salary, recruiting, insurance and
facility maintenance expenses. University incurs variable ticket handling, facility
cleaning expenses and security cost of Rs.25 per season ticket holder. The
resulting total cost function is TC = 1500000 + 25Q.
Requirements:
a. Determine the optimal ticket prices and quantities for each market, assuming
that the university adopts a new season ticket pricing policy featuring student
discounts.
b. Calculate price elasticity for each group at the activity levels identified in part
(a). Are the differences in the elasticity consistent with your recommended price
differences? Why or why not?
c. Suppose that the university drops the two-tier ticket pricing and offers uniform
price to both students and general public. Determine the equilibrium price and
output of these activity levels.
d. Which policy (two-tier pricing policy or uniform pricing policy) would you
suggest to the university?