Rebecca substitutes her income as a teaching assistant by editing term papers for undergraduates.
There are 8 students per week for who she might edit, each with a reservation price or willingness to pay as given in the following table:
Willingness
Student
to Pay
A $40
B $38
C $36
D $34
E $32
F $30
G $28
H $26
Rebecca is a profit maximizer, and her opportunity cost of her time to edit each paper is $31.
1. If Rebecca had to charge the same price to each student, how many papers should she edit? What is her economic profit?
2. Through experience and repeat business, Rebecca knows the willingness to pay of each student. How many papers will she edit if she could charge a different price to each student? What will her economic profit be?
3. Suppose Rebecca cannot charge a different price to each student but instead offers a rebate coupon. She knows from experience and repeat business that students whose willingness to pay at least $36 or more never mail in rebate coupons, while those whose willingness to pay is below $36 always do so.
Assuming the same opportunity cost of $31, what should Rebecca's list (or high) price be and what amount should she offer as a rebate? What will her economic profit be?