Considering Factors In and Out of Your Control

Chapter 14: Increasing Revenue with Advanced Pricing Strategies

where PB is the price in dollars charged to group B customers, and qB is the quantity sold to group B customers.

Your firm’s total cost and marginal cost equations are

where TC is your total cost in dollars, MC is marginal cost in dollars, and q is the total quantity of the good your firm produces.

Using this information and the following steps, you can determine the price to charge each group of consumers, how much to sell each group of consumers, and how much to produce:

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1. Determine the marginal revenue for group A customers.

First, multiply the demand equation by qA to determine total revenue, and then take the derivative of total revenue with respect to qA to determine marginal revenue.

2. Determine the marginal revenue for group B customers.

First, determine total revenue by multiplying PB by qB, and then take the derivative of total revenue with respect to qB to determine marginal revenue.

3. Set MRA = MC.

4. Substitute qA + qB for q.

The total quantity of output you produce and sell, q, is sold to customers in either group A or group B.