1.10 Suppose that you are a manager for Adobe Systems, the creator of Photoshop and other software products. Adobe rents most of its products to its customers. Suppose that it has two classes of customers for its Photoshop program: students and businesspeople. Say that the demand function from students is QS = 500,000 programs - 1,000P and the demand function for businesspeople is QB = 800,000 programs - 1,000P. In both demand functions, P is the annual rental price of the program. Because Photoshop is delivered over the Internet, the marginal cost of another program is $0. Suppose that Adobe has fixed costs of $4 million.

a. If price discrimination is possible, what rental price will you recommend that Adobe charge students, and what quantity will it rent? What rental price will you recommend that it charge businesspeople, and what quantity will it rent? What will be Adobe’s economic profit or economic loss?

b. If price discrimination is not possible, what rental price will you recommend that Adobe charge, and what quantity will it rent? What will be Adobe’s economic profit or loss?

c. Is Adobe’s economic profit larger when it price discriminates or when it sets a single rental price? Explain your answer.

d. How might Adobe successfully engage in price discrimination?