Not For Distribution Beyond the Class

October 30, 2023

You should provide scan or photo of your handwritten solutions merged into a single .pdf file via
SmartLMS. Write legibly. If your answers are not readable (including due to poor quality photos
or scans), we reserve the right to rate 0 for the work. All pages must be numbered and be merged
in the correct order. It is not allowed to copy somebody’s work or cooperate. Deadline: 23:59
3 Dec. 2023.

Question 1
Devlin-McGregor is the monopoly supplier of Provasic into a market made of two disjoint segments.
The first consists of individuals who are AARP members only. The second of AAA members only.
All buyers belong to one of the two groups. The demand functions for each segment are given
below. Here, p refers to unit price.
• AARP: D1 (p) = 20−p
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• AAA: D(p) = 10 − p
Devlin-McGregor has a constant marginal cost of production of $4 a unit.
1. If Devlin-McGregor charges the same unit price to each segment, what price should it set to
maximize its profit?
2. If Devlin-McGregor can set a different price to each segment (and not worry about arbitrage),
what is the profit maximizing price for each segment? In this case a buyer must present
evidence of their membership in the relevant organization.
3. Market research by Devlin-McGregor has identified an overlooked segment that consists of
potential buyers who are members of the AARP as well as the AAA. The demand function
for this new segment is shown below:
• AARP&AAA: D3 (p) = 15−p
3

These buyers are not included in the segments above. If Devlin-McGregor sells at two
different prices based on membership, these individuals will purchase Provasic at the lower
of the two prices. For example, if the AAA price is $5 a unit and the AARP price is $7 a
unit, members of this third segment will all purchase at the $5 a unit price. How should
Devlin-McGregor price in this case to maximize its profit?

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Question 2
Tyrell Corp. makes artificial pets and has a high-end designer product line and a basic line.
Additionally, Tyrell Corp services three separate segments: the off-world market, comprised of 50
individuals, the Los Angles human market, also comprised of 50 individuals, and the replicant
market, comprised of 100 individuals. Tyrell Corp. is not in a position to distinguish between
buyers, i.e. it cannot tell which segment a buyer belongs to. The RPs of each buyer in each
segment for each of the products is given below:

• Off-worlders’ RP for high-end pets is $10 and basic pets is $0

• LA humans’ RP for high-end pets is $6 and basic pets is $5

• Replicants’ RP for high-end pets is $4 and basic pets is $4

If the consumer is indifferent, break the tie in favor of the seller. Further suppose that each
consumer wants at most one pet, and Tyrell Corp faces no marginal cost in its artificial pet
production.

1. If Tyrell Corp sells only the high-end pets, what is the profit maximizing price?

2. If Tyrell Corp sells only the basic pets, what is the profit maximizing price?

3. If Tyrell Corp can sell both kinds of pets at different prices, what are the profit maximizing
prices?

4. Suppose Tyrell Corp can take a basic line pet, pay a cost of c per pet, and turn it into a
much glitchier bargain line pet. Off-worlders and LA humans do not value these glitchier
pets, but replicants still value these pets at $4. 1) If c = 0, what are the profit maximizing
prices, and 2) what is the highest c can be for Tyrell Corp to choose to sell all three lines
while maximizing profits.

Question 3
Two firms called 1 and 2 compete in the sale of Soma setting their respective unit prices simulta-
neously. Denote by pi the unit price set by firm i = 1, 2. Whichever firm sets the lower price gets
the entire market, whereas the other will sell zero units. If firms set the same price, then they
split the market. Each Firm must satisfy all the demand they face, i.e., they cannot turn away
customers prepared to pay the price they have posted. The total demand for the product at a
price of p is given by D(p) = 25 − p2 .
p1
If p1 < p2 , Firm 1 must sell 25 − 2
units, while Firm 2 sells nothing. If p1 = p2 = p, then
each firm must sell 12 (25 − p2 ) units.

Each firm incurs a cost of 12 q 2 to produce q units of Soma. Production is instantaneous, so

each firm produces the exact amount needed to fulfill its realized demand.

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 1. If Firm 1 sets a price of $8 a unit and Firm 2 sets a price of $9 a unit, what is each firm’s
profit?

2. Explain why the combination of price (p1 , p2 ) with p1 6= p2 can never be a Nash equilibrium.

3. Is p1 = p2 = 15 a Nash equilibrium? Explain.

150
4. Is p1 = p2 = 11
a Nash equilibrium? Explain.

5. If both firms could switch to the same production technology that exhibited constant returns
to scale, would their equilibrium profits increase?

Question 4
Until the last decade of the 20th century, 3M’s scotch tape brand enjoyed a 90% share of the U.S.
market for transparent and invisible tape. In the early 1990’s, 3M’s share started to erode with
the rise of office superstores, such as Staples and Office Depot. These retailers sold tape, under
their own names as private labels. LePage dominated the growing private label segment, with an
88% market share in 1992. Its share of overall tape sales, however, was only 14%. 3M responded
by adding a private label of its own, under the Highland name. The challenge became how to
price the generic version of its tape? To get a feel for what was going we consider a stylized setting
described below.
Suppose Staples was the only customer for tape. Staples is willing to pay at most 20 cents per
unit of generic tape (whether 3M’s or LePage’s) and is interested in buying at most 50 units of
generic tape. At a price of p cents per unit, Staples will buy 100 − p units of 3M’s branded tape.
The unit cost of generic tape is 10 cents for both 3M and LePage. The unit cost of 3M’s branded
tape is 0 cents a unit.

1. Assuming that 3M prices both branded and generic version independently, what price should
it set for branded tape to maximize profit?

2. Assume that 3M prices both branded and generic version independently. Each firm has
sufficient capacity to supply all of Staples’ demand for generic tape. What would equilibrium
prices for generic tape be?

3. It is suggested that 3M should use its power in the branded product to beat back LePage.
Would it benefit 3M to lower the price of its generic below cost, say, to 9 cents and raise the
price of its branded product above that identified in part (1)?

4. An alternative suggestion is for 3M to offer Staples a discount off the price of branded tape
identified in part (1) under the condition that Staples buys all its generic tape from 3M at
a price of 11 cents per unit. Is there a discount that would make this worthwhile for both
3M and Staples?

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