This chapter explains that a firm that engages in second-degree price discrimination charges the same consumer different prices for different units of a good. You are a monopolist with many identical customers. Each will buy either zero, one, or two units of the good you produce. A consumer is willing to pay $50 for the first unit of this good and $20 for the second. You produce this good at a constant average and marginal cost of $5. For simplicity, assume that if a consumer is indifferent between buying and not buying that he will buy.
a. If you could not engage in second-degree price discrimination, what price would you charge? How much profit per customer would you earn?
b. Suppose you offer your customers what seems to be a very generous deal: “Buy one at the regular price of $50, and get 60 percent off on a second.” How many units of this good will each customer buy? How much profit per customer will you earn?