A nightclub owner has both students and other adults as customers.

The demand for drinks by a typical student is QS = 36 6P. The demand for

drinks by a typical other adult is QO = 20 4P. There are equal numbers of

students and other adults. The marginal cost of each drink is $4.

Assume the club owner is able to implement fifirst degree price discrimination

(personalised pricing) using two-part pricing, charging an entrance fee of ES to

students and EO to other adults as well as a price per drink of pS to students

and pO to other adults.

(a) (2 Marks, Analytical) What is the students' participation constraint?

What is the other adults' participation constraint? Provide a graphical

illustration of the potential consumer surplus for each of these two groups

(students and other adults).

(b) (2 Marks, Analytical and Verbal) What is the club owner's profifit

maximisation problem, assuming that the owner chooses prices and en

trance fees for students and other adults? Do the two participation con

straints bind in equilibrium? Why or why not?

(c) (3 Marks, Analytical and Verbal) Derive the optimal price for drinks

to both students and other adults as well as the optimal entrance fees for

students and other adults, respectively.