Recessions and price discrimination Suppose that you are the marketing manager of Pulp Corp., the only producer of grapefruits in the imaginary economy of Rattleville. As a monopolist, Pulp Corp.’s objective is to maximize its profit, so it is up to you devise a way to increase profits through price discrimination. As a former economics student, you know that many firms successfully practice price discrimination by separating their market into two identifiable types of consumers—what economists call third-degree price discrimination. Examples of this include student discounts, senior citizen discounts, and ladies’ night discounts. After doing some research, you conclude that the demand for grapefruits varies greatly between consumers who clip coupons and those who do not. The following graphs show the overall daily demand and marginal revenue (MR ) for a pound of grapefruits for each group of consumers and the marginal cost (MC ) for producing a pound of grapefruits. Assume that fixed costs are equal to zero. Note: You will not be graded on any changes made to these graphs. Coupon Clippers Profit Max 0 10 20 30 40 50 60 70 80 90 100 5.00 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0 PRICE (Dollars per pound of grapefruits) QUANTITY (Pounds of grapefruits per day) Demand MR MC Non-Coupon Clippers Profit Max 0 10 20 30 40 50 60 70 80 90 100 5.00 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0 PRICE (Dollars per pound of grapefruits) QUANTITY (Pounds of grapefruits per day) Demand MR MC Complete the following table by computing the profit-maximizing price and quantity for each consumer type using the ungraded elements on the previous graphs. Consumer Type Price Quantity (Dollars per pound of grapefruits) (Pounds of grapefruits) Coupon Clippers Non-Coupon Clippers Based on this information, you would suggest that the coupon value for grapefruits should be per pound. Overall profit for Pulp Corp. will now be per day if it uses this coupon value to price discriminate its customers. Suppose the economy of Rattleville has entered a recession that changes the composition of consumers as shown on the following graphs. That is, some consumers who were formerly non-coupon clippers have now become coupon clippers, and the overall willingness of coupon clippers to pay has declined. Note: You will not be graded on any changes made to these graphs. Coupon Clippers Profit Max 0 10 20 30 40 50 60 70 80 90 100 5.00 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0 PRICE (Dollars per pound of grapefruits) QUANTITY (Pounds of grapefruits per day) Demand MR MC Non-Coupon Clippers Profit Max 0 10 20 30 40 50 60 70 80 90 100 5.00 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0 PRICE (Dollars per pound of grapefruits) QUANTITY (Pounds of grapefruits per day) Demand MR MC Complete the following table by computing the profit-maximizing price and quantity for each consumer type during the recessionary period. Consumer Type Price Quantity (Dollars per pound of grapefruits) (Pounds of grapefruits) Coupon Clippers Non-Coupon Clippers Which of the following are conclusions you can make about market conditions in this economy? Check all that apply. Select an answer for question 1, list with 4 items Profit is higher during the recession than it was before. Profit is lower during the recession than it was before. Profit would be lower both before and during the recession if coupons were not offered. Profit would be higher both before and during the recession if coupons were not offered. Continue without saving

multipleQuestions newQuestion What are the profit-maximizing price and quantity for coupon clippers before the recession? newAnswer The profit-maximizing price and quantity for coupon clippers can be determined from the demand and marginal revenue graphs, typically where MR = MC. newQuestion What are the profit-maximizing price and quantity for non-coupon clippers before the recession? newAnswer The profit-maximizing price and quantity for non-coupon clippers can also be found where MR = MC on their respective graphs. newQuestion What are the profit-maximizing price and quantity for coupon clippers during the recession? newAnswer The profit-maximizing price and quantity for coupon clippers during the recession will be lower due to decreased willingness to pay, found at the new intersection of MR and MC. newQuestion What are the profit-maximizing price and quantity for non-coupon clippers during the recession? newAnswer The profit-maximizing price and quantity for non-coupon clippers during the recession will also be adjusted based on the new demand and marginal revenue curves. newQuestion What conclusions can be made about market conditions in Rattleville? newAnswer Profit is lower during the recession than it was before, and profit would be lower both before and during the recession if coupons were not offered.