1. A monopolist faces a market split evenly between high valuation consumers with in dividu al...

 

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1. A monopolist faces a market split evenly between high valuation consumers with in dividu al inverse demand PH = 20 – YH and low valu ation consumers with individual inverse demand PL = 16 – 2yL For convenience, suppose the firm has a margin al cost equal to zero. Moreover, arbitrage is not possible. (a) (15 points) Assume the firm cannot observe group st atus (i.e., cannot identify if a customer has a high or low valuation). Determine the firm's best second-degree pricing scheme. Show this outcome on a graph and explain why your answer is the best strategy for the firm. (b) (5 points) Is the market outcome in part (a) Pareto efficient? If not, calculate the dead weight loss. (c) (15 points) How will your answer in part (a) change if the low valuation customers have an inverse demand given by PL = 4 - 2yL? Fully explain your answer. 1. A monopolist faces a market split evenly between high valuation consumers with in dividu al inverse demand PH = 20 – YH and low valu ation consumers with individual inverse demand PL = 16 – 2yL For convenience, suppose the firm has a margin al cost equal to zero. Moreover, arbitrage is not possible. (a) (15 points) Assume the firm cannot observe group st atus (i.e., cannot identify if a customer has a high or low valuation). Determine the firm's best second-degree pricing scheme. Show this outcome on a graph and explain why your answer is the best strategy for the firm. (b) (5 points) Is the market outcome in part (a) Pareto efficient? If not, calculate the dead weight loss. (c) (15 points) How will your answer in part (a) change if the low valuation customers have an inverse demand given by PL = 4 - 2yL? Fully explain your answer.