Question

) Automobile manufacturers commonly sell new car models at the full suggested retail price during the first few years the car is on the market, and they do not offer rebates or discounts. After the initial sales period, the manufacturers typically offer rebates or discounts on these models. The marginal cost of manufacturing the cars is constant across time. Which of the following statements is true? A) The firms practice peak-load pricing by charging a higher price in the initial sales period. B) Early buyers have higher reservation prices for the new models, and the manufacturers maximize profits by charging these buyers a higher price. C) The marginal revenue from buyers who purchase these cars after the initial sales period must be lower that the marginal revenue from early buyers. D) To maximize profits, the firms equate the buyers' reservation prices across time

Answer 1

Correct option is (B).

Early buyers have higher reservation price, and have less elastic demand than late buyers. So the seller practices price discrimination by charging these buyers with less elastic demand a higher price (and charging late buyers with more elastic demand a lower price).