part 3 4 5 Price DiscriminationWhen producers have market power and they sell a good that cannot be resold, the possibility forprice discrimination arises. Price discrimination occurs when a producer is able to charge consumerswith different tastes and preferences different prices for the same good.We know profit maximization for a firm that is able to set a single price occurs when the firm pro-duces the quantity at which MR = MC. If a producer is able to price discriminate, however, then prof-its can be even higher.Part APricing with Market Power and Consumer SurplusPat's Patriotic Tattoos is the only tattoo parlor in town. Pat tattoos only images of the American flag. Thereare 20 consumers who are willing to buy a tattoo. Each consumer is interested in buying only one tattoo,but they vary in their willingness to pay. One consumer is willing to pay $20 for a tattoo; another is willingto pay $19; a third, $18, down to the consumer least willing to pay who has a reservation price of $1.1. The demand schedule is given below in Figure 36.1. Complete the table.Figure 36.1.Demand SchedulePriceQuantityTotal RevenueMarginal Revenue$201921831741615614131211101011121314615164171821920 First-Degree Price Discrimination3. Prove to yourself that a market price of $17 will generate a total consumer surplus of $6.Hint: The consumer surplus generated by the consumer willing to pay $20 is (20-17) x1= 3.CS =4. Assume that the average and marginal costs are constant and equal to 14. If Pat produces the per-fectly competitive quantity and charges the perfectly competitive price,(A) what price will Pat charge for a tattoo?.(B) what quantity wilI Pat supply?.(C) what is the amount of consumer surplus generated?,CS5. Assume that the average and marginal costs are constant and equal to 14. If Pat produces themonopoly quantity and charges the monopoly price,(A) what price will Pat charge for a tattoo?(B) what quantity will Pat supply?(C) what is the amount of consumer surplus generated?CS =6. Again, assume that the average and marginal costs are constant and equal to 14. Now assume thatPat knows the tastes and preferences of all consumers and that the conditions that allow price dis-crimination apply.(A) What quantity will Pat supply?(B) At what prices will she sell tattoos?$17,,(C) What is the amount of consumer surplus generated?CS =

First, we will complete the table: TR=P*Q MR=dTR/dQ

First-Degree Price Discrimination 3. Prove to yourself that a market price of $17 will generate a total consumer surplus of $6. Hint: The consumer surplus generated by the consumer willing to pay $20 is (20 -17) x1=3. CS= 4. Assume that the average and marginal costs are constant and equal to 14. If Pat produces the per fectly competitive quantity and charges the perfectly competitive price, (A) what price will Pat charge for a tattool. (B) what quantity will Pat supplyt. (C) what is the amount of consumer surplus generated? CS 5. Assume that the average and marginal costs are constant and equal to 14. If Pat produces the monopoly quantity and charges the monopoly price, (A) what price will Pat charge for a tattoo? (B) what quantity will Pat supply? (C) what is the amount of consumer surplus generated? CS=

First-Degree Price Discrimination 3. Prove to yourself that a market price of $17 will generate a total consumer surplus of $6. Hint: The consumer surplus generated by the consumer willing to pay $20 is (20 -17) x1=3. CS= 4. Assume that the average and marginal costs are constant and equal to 14. If Pat produces the per fectly competitive quantity and charges the perfectly competitive price, (A) what price will Pat charge for a tattool. (B) what quantity will Pat supplyt. (C) what is the amount of consumer surplus generated? CS 5. Assume that the average and marginal costs are constant and equal to 14. If Pat produces the monopoly quantity and charges the monopoly price, (A) what price will Pat charge for a tattoo? (B) what quantity will Pat supply? (C) what is the amount of consumer surplus generated? CS=

ENGR.ECONOMIC ANALYSIS

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ISBN:9780190931919

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Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

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Question

part 3 4 5

Price Discrimination
When producers have market power and they sell a good that cannot be resold, the possibility for
price discrimination arises. Price discrimination occurs when a producer is able to charge consumers
with different tastes and preferences different prices for the same good.
We know profit maximization for a firm that is able to set a single price occurs when the firm pro-
duces the quantity at which MR = MC. If a producer is able to price discriminate, however, then prof-
its can be even higher.
Part A
Pricing with Market Power and Consumer Surplus
Pat's Patriotic Tattoos is the only tattoo parlor in town. Pat tattoos only images of the American flag. There
are 20 consumers who are willing to buy a tattoo. Each consumer is interested in buying only one tattoo,
but they vary in their willingness to pay. One consumer is willing to pay $20 for a tattoo; another is willing
to pay $19; a third, $18, down to the consumer least willing to pay who has a reservation price of $1.
1. The demand schedule is given below in Figure 36.1. Complete the table.
Figure 36.1.
Demand Schedule
Price
Quantity
Total Revenue
Marginal Revenue
$20
19
2
18
3
17
4
16
15
6
14
13
12
11
10
10
11
12
13
14
6
15
16
4
17
18
2
19
20

First-Degree Price Discrimination
3. Prove to yourself that a market price of $17 will generate a total consumer surplus of $6.
Hint: The consumer surplus generated by the consumer willing to pay $20 is (20-17) x1= 3.
CS =
4. Assume that the average and marginal costs are constant and equal to 14. If Pat produces the per-
fectly competitive quantity and charges the perfectly competitive price,
(A) what price will Pat charge for a tattoo?.
(B) what quantity wilI Pat supply?.
(C) what is the amount of consumer surplus generated?,
CS
5. Assume that the average and marginal costs are constant and equal to 14. If Pat produces the
monopoly quantity and charges the monopoly price,
(A) what price will Pat charge for a tattoo?
(B) what quantity will Pat supply?
(C) what is the amount of consumer surplus generated?
CS =
6. Again, assume that the average and marginal costs are constant and equal to 14. Now assume that
Pat knows the tastes and preferences of all consumers and that the conditions that allow price dis-
crimination apply.
(A) What quantity will Pat supply?
(B) At what prices will she sell tattoos?
$17,
,
(C) What is the amount of consumer surplus generated?
CS =

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