Problem
There is only one firm that produces COOL sneakers, and its product has no substitutes. There are two types of customers in the market for COOL sneakers; type H (Lady Gaga) and type L (you!) with the following demand functions: QH= 2000 - 5P and QL =500 - 20P. If there is no fixed costs and the marginal cost of producing sneakers is $10:
1. What is the price and quantity produced if we charge one price to everyone?
2. What is the producer surplus?
3. What is the price and quantity if we want to charge different prices to each consumer group?
4. Find the surplus from engaging in this pricing strategy and compare your answer to part (1).