Question 3

In a small college town, there is one fast food chain with two branches. Each branch faces its own demand curve for burgers:

QD 1 = 50 P1

QD 2 = 45 ( 3P2 / 2 )

The firm's cost function is given by:

C(Q) = 2Q

This means that the firm has constant marginal cost:

MC = 2

(a) Suppose that the firm charges the same price at both locations. Find the profit-maximizing price P it will charge.

(b) What profit does the firm earn in the above situation?

(c) Now, suppose that the firm engages in 3rd degree price discrimination by charging a different price at each branch. What price does it charge at each branch (P1 , P2 )?

(d) What profit does the firm earn when it engages in price discrimination?