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You work for a company that sells a product to business customers and non-business (leisure) customers. The company conducts a marketing / strategy exercise, testing different prices in an attempt to map out the demand curves for the two sets of customers. Your job is to take the output of the price test and convert it into profit maximizing prices / quantities.1. Load the data into either Google Sheets, Excel or the program of your choice. Each file includes the following variables: Price, Q_business (quantity purchased by business customers), Q_leisure (quantity purchased by leisure customers). • How many observations are there in the dataset? • What are the minimum, maximum and average prices? • What are the minimum, maximum and average quantities purchased by the business and leisure customers? • Based on your answers to the above questions, are there any unusual data points that you’d flag for further examination. 2. Strange data points non-withstanding, estimate the demand curves for business and leisure customers. Transform each into an inverse demand curve. (Note: after estimating the demand curve, you should feel free to round either the intercept and slope as needed). Although you should feel free to use any program to solve the problem set, STATA (in the computer labs) is well equipped to run regressions if you are comfortable with it. As a reminder, the relevant code to run a regression of variable Y on variable X with robust standard errors is: regress y x, robust .3. Assume that the firm’s MC = 30. What would be the optimal prices to set to each group if the firm could price discriminate between business and leisure customers? How much profit does the firm generate from third degree price discrimination? 4. How much additional profit could the firm generate from business customers if could perfectly price discriminate? How much would the firm sell? 5. Describe two reasons why a firm might not be able to engage in third-degree price discrimination. 6. Suppose that the firm cannot price discriminate? What is single price will maximize the firm’s profits across both sets of customers? What are firm profits? 7. True or False and then Explain: Firm profits are always higher if the firm can engage in third degree price discrimination than if it has to charge different groups the same price.


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