Group and Nonlinear Price Discrimination:

Assume a cell-phone service provider in a small town facing two kinds of consumers: residential and commercial.

Residential (Group 1) demand is given by: P = 100 - Q

Commercial (Group 2) demand is given by P = 100 - 2Q

MC of production = $20.

a) If the firm can group price discriminate, what are the profit-maximizing P and Q for each consumer group. (4 pts)

b) Next assume the firm does not price discriminate based on group, but charges P = $75 for the first few services and P = $20 for the remaining services.

i) Derive the market demand function. (3 pts)

ii) Calculate the quantity sold at P = $75 and at P = $20 (Note P = $20 for the remaining services). (2 pts)

iii) What is the DWL under this nonlinear pricing scheme? (1 pt.)