A monopolist faces a market evenly split between high valuation consumers, with demand P^h= 4- 1/2y^h, and low valuation consumers with demand P^l= 3- 3/4y^l. For convenience, suppose the firm has a marginal cost equal to zero. First, suppose the arbitrage is impossible for this good, and so the firm is free to use two-part tariffs as a pricing scheme - the firm can charge a fee as well as a per unit price.

1)Determine the firm's best second-degree price discriminating scheme in this case. Use a graph to justify your answer. Now suppose that arbitrage is possible for this good so the firm cannot use two part tariffs.

2)Determine the firm's profit-maximizing third-degree "price discrimination" quantities for each market. At this outcome, in which market does the firm operate at a higher point elasticity? Why?