Question

TotsPoses, Inc., a profit-maximizing business, is the only photography business in town that specializes in portraits of small children. George, who owns and runs TotsPoses, expects to encounter an average of eight customers per day, each with a reservation price shown in the following table. Assume George has no fixed costs, and his cost of producing each portrait is $16. Customer Reservation price ($ per photo) 1 50 2 46 3 42 4 38 5 34 6 30 7 26 8 22

a. Suppose George is permitted to charge two prices. He knows that customers with a reservation price above $30 never bother with coupons, whereas those with a reservation price of $30 or less always use them. At what level should George set the list price of a portrait? At what level should he set the discount price? How many photo portraits will he sell at each price? List price of a portrait: $

Number of portraits to be sold at the list price: portraits Discount price of a portrait: $

Number of portraits to be sold at the discounted price: portraits

b. In this case, what is George’s economic profit and how much consumer surplus is generated each day?

Economic profit: $

Consumer surplus: $

Answer 1