Suppose we have two types of consumers (for simplicity we’ll assume that there is one person of each type). They have inverse demand curves given by: p1 =110−2q1 and p2 =70−4q2. Initially, we will assume that the monopolist can tell them apart and that consumers cannot change or fake their type. Let the marginal cost of production be equal to 10. Label group 1 as the “high type” and group 2 as the “low type.”
(A) Next draw two graphs of the demand functions for the two consumer types, with the optimal block pricing schemes illustrated. Explain graphically what happens when the monopolist reduces q2.
(B) At what point will the monopolist want to stop decreasing q2?