Use the following to answer question:
Figure 10.7
-(Figure 10.7) Suppose a firm has two types of customers but cannot tell which type of buyer the customer is before a purchase is made. If the firm wanted to use quantity discounting, it should charge _____ per unit for any quantity purchased or _____.
A) $12; $4 per unit for 4 or more units
B) $12; $7 for 3 or more units, but the pricing scheme would not be incentive-compatible for Type B customers
C) $7; $4 for 2 or more units, but the pricing scheme would not be incentive-compatible for Type A customers
D) $8.50; $4 for 3 or more units

Question

Use the following to answer question:
Figure 10.7 
-(Figure 10.7) Suppose a firm has two types of customers but cannot tell which type of buyer the customer is before a purchase is made. If the firm wanted to use quantity discounting, it should charge _____ per unit for any quantity purchased or _____.
A) $12; $4 per unit for 4 or more units 
B) $12; $7 for 3 or more units, but the pricing scheme would not be incentive-compatible for Type B customers 
C) $7; $4 for 2 or more units, but the pricing scheme would not be incentive-compatible for Type A customers 
D) $8.50; $4 for 3 or more units

Quizplus · Accepted Answer

Option A is not feasible for type B customers and option C is not feasible for type A customers, so the only option left is B. The pricing scheme incentivizes both types of customers to purchase more than one unit in order to receive the discount. Type B customers may not be incentivized to purchase more than two units because the price of $7 per unit is already lower than the $12 per unit that they would pay otherwise. However, this pricing scheme is still the best option considering the constraints given in the question.

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