Question

A Manufacturer of flash drives has a profit function of P= t - q²where t is the price charged for a flash drive and q² is the cost of producing a drive whose capacity is q gigabytes. A consumer of type 'x' has a utility function of u = xq-t, where 'x' takes on the value of 8 for H-type consumers or 6 for L-type consumers. There are 100 consumers of each type. A consumer gets zero utility if she does not buy.

Calculate the optimal SEPARATING CONTRACT (q_L,t_L) and (q_H,t_H) under ASYMMETRIC INFORMATION

Answer 1

If the consumer is L type, contract L provides him utility 0 but if he chooses H contract then his utility will decrease less then 0 . So if he has an option for both H and L then he will go L.

Similarly H type consumer if he chooses L contract then his utility is 0 but if he chooses H contract then he will have more utility then L type contract. So he will choose H contract. So. There is no optimal contract. For both of them there is separate cotract for both of them exaplained in the table.