Question Description
Cambrian Railways runs a daily container freight train betweenCardiff and Birmingham. Its two major customers are British Steeland the Welsh Farming Co-operative. The demand for containers byeach customer is given by the equations:P 1 = 500- 8Q1 for British SteelP2 = 400-5Q2 for Welsh farming.P; is the price charged by Cambrian per container, and Q; is thenumber of containers used by each customer.Cambrian's total cost function is given by the equation:TC = 10 000+20Qwhere Q is the number of containers per trip.(a) What are the necessary conditions for profitable price discriminationby Cambrian?(b) What profit -maximising rule will Cambrian use if setting prices asa discriminator? Determine the profit-maximising quantity offreight service Cambrian will supply, show how this will bedivided between steel and agriculture and find the prices chargedin each market. Calculate Cambrian's total profit.(c) Assume that Cambrian is prevented by law from price discrimination.Determine Cambrian's price and output combinationto maximise profit, and hence estimate the opportunity cost toCambrian of the Anti-Price Discrimination law.
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