Question

TotsPoses, Inc., a profit-maximizing business, is the only photography business in town that specializes in portraits of small children. George, who owns and runs TotsPoses, expects to encounter an average of eight customers per day, each with a reservation price shown in the following table. Assume George has no fixed costs, and his cost of producing each portrait is $35.

a. Complete the following table.

Instructions: If you are entering any negative numbers be sure to include a negative sign (-) in front of those numbers. Enter your responses as whole numbers.

Customer	Reservation price ($ per photo)	Total revenue ($ per day)	Marginal revenue ($ per photo)
1	50
2	46
3	42
4	38
5	34
6	30
7	26
8	22

How much should George charge if he must charge a single price to all customers? $__

At this price, how many portraits will George produce each day? __ portraits

What will be his economic profit? $__ per day

b. How much consumer surplus is generated each day at this price? $__

c. What is the socially efficient number of portraits? __ portraits

d. George is very experienced in the business and knows the reservation price of each of his customers. If he is allowed to charge any price he likes to any consumer, how many portraits will he produce each day? __ portraits.

What will his economic profit be? $__ per day

e. In this case, how much consumer surplus is generated each day? $__

Answer 1

Customer	Reservation Price	TR	MR	MC
1	50	50	50	35
2	46	92	42	35
3	42	126	34	35
4	38	152	26	35
5	34	170	18	35
6	30	180	10	35
7	26	182	2	35
8	22	176	-6	35

a. George should charge $46 to each customer because marginal revenue ($42) exceeds marginal cost ($35) up to customer 2. At this price, George will produce 2 portraits per day. His profit will be (42*2) - (35*2) = $14.

b. Conssumer surplus generated will be $4.

$4 (50-46) for first customer and $0 (46-46) for second customer.

c. 4 because MB of $38 that the fourth customer is willing to pay exceeds the cost to George of $35 per portrait. Alternately, the socially efficient output level is where Price= Marginal Cost. After fourth unit, Price < Marginal Cost, implying losses.

d. In this case, George is allowed to perfectly price discriminate. Thus, he will charge each customer his or her own reservation price. He will produce 4 portraits, because the fourth customer's reservation price ($38) is more than George’s production cost of $35.

A $50 - $ 35 = + $15

B $46 - $ 35 = + 11

C $42 - $ 35 = + $7

D $38 - $ 35 = + $3

Summing the individual producer surpluses gained from each customer, and subtracting total production costs, results in a total profit to George of $36.

e. The consumer surplus is $0 because all surplus is taken by the producer under perfect price discrimination.