Question

Question 1

Suppose a yacht dealer has five potential customers who each have a maximum willingness to pay of:
$15 million; $13 million; $11 million; $9 million; $7 million
The MARGINAL revenue (with no price discrimination; in millions of dollars) at the following prices are:
at a price of $15 million
at a price of $13 million
at a price of $11 million
at a price of $9 million
at a price of $7 million
*In answering this question, assume the price begins somewhere above $15 million (with zero sales) and is continually lowered to $7 million.*

QUESTION 2

If the yacht dealer wants to maximize TOTAL revenue, how much should he charge?

$15 million

$13 million

$11 million

$9 million

$7 million

QUESTION 3

Suppose the marginal cost of selling a yacht is $6 million. If the yacht dealer wants to maximize NET revenue, how much should he charge?

$15 million

$13 million

$11 million

$9 million

$7 million
1.5 points

QUESTION 4

Supposing only marginal (no fixed) costs, how many millions of dollars in profits would the yacht dealer make?


QUESTION 5

Now suppose that the yacht dealer can engage in perfect price discrimination, if this were the case (with no fixed costs), how much profit would the yacht dealer make?

Answer 1

Under perfect price discrimination, the price charged to each individual will be equal to their willingness to pay.

To answer all these question, we can use the following table:

	With No Price Discrimination			With Perfect Price Discrimination
Price	Demand of yacht	Total Revenue	Marginal Revenue	Marginal Revenue	Total Revenue
$15 million	1	$15 million	$15 million	$15 million	$15 million
$13 million	2	$26 million	$11 million	$13 million	$28 million
$11 million	3	$33 million	$7 million	$11 million	$39 million
$9 million	4	$36 million	$3 million	$9 million	$48 million
$7 million	5	$35 million	-$1 million	$7 million	$55 million

Ans 1:

Suppose a yacht dealer has five potential customers who each have a maximum willingness to pay of:
$15 million; $13 million; $11 million; $9 million; $7 million

The MARGINAL revenue (with no price discrimination; in millions of dollars) at the following prices are:
at a price of $15 million : $15 million
at a price of $13 million : $11 million
at a price of $11 million : $7 million
at a price of $9 million : $3 million
at a price of $7 million : -$1 million

Ans 2:

From the above table, we can say that if the yacht dealer wants to maximize TOTAL revenue, he should charge

$9 Million. At this price, the total revenue is maximum and equals to $36 million.

Ans 3:

Suppose the marginal cost of selling a yacht is $6 million. If the yacht dealer wants to maximize NET revenue, he should charge the price $11 million. At this price, he will sell 3 yachts but if he sells 4 yachts at $9 million, then MR is $3 million which is less than the MC. So, to maximize NET revenue, he will charge $11 million

Ans 4:

Selling 3 yachts at $11 million, total revenue = $33 million (The seller will not sell more than this quantity as marginal cost will be higher than marginal revenue)

Selling 3 yachts at marginal cost of $6 million, total cost = $18 million ( as there is no fixed cost)

So, profit = $(33 - 18) million = $15 million

Ans 5:

Under price discrimination, the seller will sell 5 units as marginal revenue is higher than marginal cost for all. So, the total revenue (from the table) is $55 million

For producing 7 units of yacht at MC = $6 million, the total cost is $42 million

So, profit = $(55 - 42) million = $13 million