Price Discrimination Subject to Capacity Constraints
This exercise shows you how to determine the profit-maximizing prices and quantities for a firm that wants to engage in third-degree price discrimination but operates with a capacity constraint. Suppose that the demand curve in market segment 1 is Q1 = 200 – 2P1 and the demand curve in market segment 2 is Q2 = 250 – P2. The marginal cost of selling in each market segment is $10 per unit. The firm’s overall capacity is 150 units.
What are the profit-maximizing quantities and prices in each market segment?