ECO – Price Discrimination Questions

| November 15, 2016

1. Coach Industries, Inc. is a leading manufacturer of recreational vehicle products. Its products include travel trailers, fifth-wheel trailers (towed behind pick-up trucks), and van campers, as well as parts and accessories. Coach offers its fifth-wheel trailers to both dealers (wholesale and retail customers). Mr. Ernie Pantusso, Coach’s controller, estimates that each fifth-wheel trailer costs the company $10,000 in variable labor and material expenses. Demand relations for fifth-wheel trailers are:
P =$15, 000 – $5QW


PR =$50, 000 – $20QR


A. Assuming that the company can price discriminate between its two types of customers (wholesale buyers and retail buyers), calculate the profit maximizing price, output, and profit contribution level for each consumer type. (30 points)
B. Calculate the price elasticity of demand for each customer type at the activity levels identified in part A. (10 points)
C. Are the differences in these elasticity consistent with your recommended price differences in part A. Why or why not? Explain in full. (10 points)

2. Ethics and Welfare Economic:
Should people have the right to sell parts of their bodies?
The US Congress believes that the answer is NO. In 1984 it passed the National Organ Transplantation Act (NOTA)
( ), which prohibits the sale of organs for transplantation. Organs may only be donated.
Although the law prohibits their sale, it does not make organs valueless. Instead, it prevents those who supply organs (living persons or families of the deceased) from reaping their economic value.
To fully comprehend the effects of NOTA, consider the kidney market. Suppose the demand function is QD =16,000 -0.2P and the supply function is QS = 8,000 + 0.2P, where P is the price of kidney in dollars, and Q is the quantity in thousands per year.

(a) Determine the market clearing price and quantity. Show all work. [5 pts.]
(b) Using Excel software, plot the demand and supply curves for kidneys. Draw large well labeled diagrams; being sure to include the neat table of data in grid form!
(c) Because the 1984 act prohibits the sale of kidneys (the act effectively makes the price zero), supply is limited to the number of kidneys that people donate. How many kidneys are donated per year? Indicate this constrained supply as a vertical line on your diagram in (a). At what price level does this line intersect the demand curve?
(d) Calculate the change in surplus to kidney suppliers and recipients as a result of this policy. Show all calculations made (formula, steps taken, explanations, etc.).

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