Suppose that John is the only TV seller in Madison. The average variable cost is constant at $20. There is no fixed cost. Suppose further that each consumer may buy up to one TV.
1. Suppose that there are only rich people in Madison and there are 20 of them. Each is willing to pay up to $50 for each TV. What should be the price of TVs to maximize John’s profit?
2. Instead, suppose that there are 3 groups of consumers, high income, medium income and low income and there are 20 of them in each group. Each of the rich is willing to pay up to $50. Each of the medium is willing to pay up to $40. Each of the poor is willing to pay up to $10. If John is able to price discriminate, what would be his maximum attainable profit?
3. From the previous question, suppose instead that John cannot charge different prices to different consumers, at which price should John sell TVs in order to maximize his profit?