Answer Happy

6. You are the marketing manager of a music academy. You have estimated the typical consumer's yearly demand function for piano lessons to be Q = 80 - 2P. The cost for offering each lesson is $10. Assume that fixed cost is zero. (a) If the music academy charges the same price for every lesson (uses conventional pricing), calculate the maximum profit they can obtain in a given year. The maximum profit is $450. (b) Give an example of how could the music academy use third-degree price discrimination. In such context, identify two different types of customer and identify which type has a more elastic demand. Justify your answer. One example is senior discounts. The two types of customers are seniors (more elastic) and non-seniors (less elastic). (c) Explain how to implement two-part pricing in this business. Calculate the profit generated by the typical customer of the academy. Charge an annual membership of $900. Then charge $10 per lecture. The profit is $900. (d) Suppose now that you decide to charge $30 for each of the first 20 lessons. Using second degree price discrimination, each additional lesson after that costs only $15. How many lessons will be purchased by the typical customer in a year? Calculate consumer surplus, producer surplus and deadweight loss. The typical customer will purchase 50 lessons. CS = $325, PS = $550 and DWL = $25.