Final answer:
The food truck owner uses second-degree price discrimination to sell large and small packages to students and non-students respectively, considering the marginal cost of $2 to set prices that maximize profits while ensuring marginal revenue equals marginal cost.
Step-by-step explanation:
The local food truck's scenario involves a form of price discrimination where the owner is attempting to segment the market into students and non-students based on their demand functions and maximize profits by offering different packages at different prices. In economic terms, this is known as second-degree price discrimination. The key is to set a price for the large package attractive enough for students while ensuring the small package is priced such that non-students choose it over the large package. To calculate the maximum price for each package, we must consider the marginal cost (MC), which is $2, and the demand functions—p = 10 − q for students and p = 4 − 2q for non-students.
Since students have a higher willingness to pay, they will be targeted with a large package. In contrast, non-students will be discouraged from buying the large package due to its higher overall cost relative to their utility from consuming the product. By setting the price for the small package at a point where non-students still derive positive utility but less than from consuming the larger package, monopolistic competitors like the Authentic Chinese Pizza shop reach their profit-maximizing level of output by ensuring MR = MC. This example illustrates the strategic pricing approach by monopolistic competitors to maximize revenue and cost schedule.