Suppose that a monopoly retailer has exactly 2 units of a perishable product available. It cannot increase

Question:

Suppose that a monopoly retailer has exactly 2 units of a perishable product available. It cannot increase its stock in the relevant period. Customers have unit demand and either a high or a low willingness to pay: 1 consumer is willing to pay r = 10 and 2 consumers are willing to pay r = 6. Customers arrive in random order at the shop. The retailer has to set a price for each of the 2 units. The retailer’s opportunity cost of selling is zero.

1. What is the optimal pricing of the 2 units of the product if the retailer has to set the same price for all units?

2. What is the optimal pricing of the 2 units of the product if the retailer is allowed to set different prices for these units? What are the monopolist’s expected profits?

3. Provide a profit comparison. Discuss your result. Is welfare larger or smaller in (2) than in (1)?

Opportunity Cost
Opportunity cost is the profit lost when one alternative is selected over another. The Opportunity Cost refers to the expected returns from the second best alternative use of resources that are foregone due to the scarcity of resources such as land,...

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