A night-club owner has both student and adult customers. The demand for drinks by a typical student is QS = 18 − 3P. The demand for drinks by a typical adult is QA = 10 − 2P. There are equal numbers of students and adults. The marginal cost of each drink is $2.
(a) If the club owner could separate the groups and practice third-degree price discrimination, what price per drink would be charged to members of each group? How many drinks are consumed by each consumer? What would be the consumer surplus of each group? What would be the club owner’s profit in this case?
(b) Now consider the night-club owner implements two-part pricing to charge an entry fee for student and adult. How should the owner of night-club design the two-part pricing? Namely, what are the entry fees charged to student and adult? Again, what price per drink would be charged? How many drinks are consumed by each consumer? What would be the consumer surplus of each group? What would be the club owner’s profit in this case?