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 $25.

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

a. Suppose George is permitted to charge two prices. He knows that customers with a reservation price above $30 never bother with coupons, whereas those with a reservation price of $30 or less always use them. At what level should George set the list price of a portrait? At what level should he set the discount price? How many photo portraits will he sell at each price?

List price of a portrait: $__   

Number of portraits to be sold at the list price: __portraits

Discount price of a portrait: $__   

Number of portraits to be sold at the discounted price: __portraits

b. In this case, what is George’s economic profit and how much consumer surplus is generated each day?

Economic profit: $__   

Consumer surplus: $__

Answer 1

Cost per photo is $ 25.

George has the ability to charge two different price thus he will divide the customers into two groups. The first group he will classify on the basis of MR greater than MC.

From the above table we can see the MR of 4th photo is $ 26 that is greater than cost. Hence, George will set a price of $ 38 per photo and 4 photos.

List price of Portrait = $ 34

Number of portraits sold at list price = 4

Calculation of discount price.

Discount price = $ 30

(Note: Since at this price MR = $ 26)

No of portraits sold at discounted price = 2

b. Economic profit = 38×4 + 30×2 - 25 ×6 = $ 62

Consumer surplus

= (50-38) + (46 - 38) + (42 - 38) + (38 -38) + (34 -30) + (30 -30)

= 12 + 8 + 4 + 0 + 4 + 0

= $ 28