Price Quantity Marginal cost (dollars per haircut) (haircuts per hour) (dollars per hour) I 20 I 0 I —
A1 Hair Care is a natural monopoly owned by Adam. Table 1 shows the demand schedule (the first two columns) and A1’s marginal cost schedule (the second and third columns). A1 Hair Care has done a survey and discovered that it has four types of customers each hour: one woman who is willing to pay $18, one concession holder who is willing to pay $16, one student who is willing to pay $14, and one boy who is willing to pay $12.
Use Table 1 to answer questions (a), (b), (c)and (d) below:
TABLE 1
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Order Paper NowQUESTIONS:
a) If Adam is a single-price monopolist, what price will he charge and how many haircuts per hour will he sell? (Hint: construct and compute the Total Revenue and Marginal Revenue columns). What is his total revenue? What is the market consumer surplus? (6 marks)
b) If Adam price-discriminates, what is the price each type of customer is charged? How many haircuts does Adam sell? What is the increase in his total revenue? (6 marks)
c) Which customer benefits from Adam’s price discrimination? Is the outcome efficient? What happens to consumer surplus? (4 marks)
d) If Adam finds a fifth customer willing to pay $10 an hour for the haircut, should he sell to him? Why or why not? (4 marks)