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Solved Exercise- Price Discrimination (1)

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2 views

Solved Exercise- Price Discrimination (1)

Uploaded by

p24dharani
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Solved Example

1. A company is selling a unique product to 5 different customers. The maximum


willingness to pay for each customer is $100, $90, $80, $70, and $60 respectively. If
the company uses first-degree price discrimination, how much total revenue will it
generate?

Solution: If the company is following first degree price discrimination, it will charge
a price equal to each consumer’s willingness to pay. Therefore, the total revenue =
100+90+80+70+60 = 400.

2. Sunshine Company sells its product in two different cities, West view and East View.
The company wants to price the product in these two markets using third degree price
discrimination. It has engaged a consultant and he collected data, which are as given
below.
The marginal cost of production of the product is Rs. 4 per unit. The demand
functions of the markets are as given below:
P1=100−3.5 Q1
P2=40 – 1.5 Q2
Assume yourself in the place of the consultant and find the unit price of the product in
each market using the third-degree price discrimination.

Solution:
MR 1=100−7 Q1
MR 2=40−3 Q1

MR 1=100−7 Q1 =M C 1=4 MR 2=40−3 Q2=M C 2=4


100−7 Q1=4
Q1=13
P1=100−3.5∗13=54.5

40−3 Q2=4
Q2=12
P2=40 – 1.5∗12=22

3. Mr. Bin accidentally discover a new personalized wonder Pen that read owner’s mind
and write. He starts his business of wonder Pen. He incurs a fixed cost of $20,000 per
year and Variable cost is $15 per pen. He observes that there are two different
customer segments interested in buying the Pen. One group consists of students and
other group consists of everybody else except students. Let us call the second group
as ALL. The wonder Pen works with facial recognition; hence resale is not possible.
The demand curve of students is given as: 2000 – 50 P = Q
The demand curve for ALL: 5500 – 100P = Q
a. How should Mr. Bin price if he is trying to supply both customer segments and
can easily segment the two types of customers?
b. What should be his price in both the markets when he cannot segment the two
types of customers? (Optional)

a. Let Q s ∧Ps represent the quantity supplied and price charged to students.
Similarly, let Q a∧P a represent the quantity supplied and price charged to all other customer
Inverse demand function for students: Ps =( 2000−Q s ) / 50M R s=( 2000−2 Qs ) / 50For profit
maximization: MR = MC
( 2000−2Q s ) / 50=15
Qs =625 ; P s=27.5
Inverse demand function for ALL: Pa=¿ ( 5500−Qa ) / 100
M R a=( 5500−2 Qa ) / 100 For profit maximization: MR = MC
( 5500−2Q a ) / 100=15
Qs =2000 ; P s=53

b. If Mr. Bin cannot segment two consumer type, he will charge same price to both consumers.

When 55 ≤ P ≥ 40 , only ALL will buy when price is above 40, students will not buy. Therefore,
Mr. Bin will be facing following demand curve for price above 40 and less than 55 (note: when
P>55, no consumer will buy the pen).

Q = 5500-100P

When P<55, both students and other consumers will buy the product. Therefore, demand curve
faced by Mr. Bin will be: Qs+Qa = 7500-150 P.

We solve for both demand segment and choose the price and quantity combination which is
giving us better profit.

Case 1: when catering to only ALL, P = 53, Q = 2000 (calculated above). Profit = 76000

Case 2: when catering to both types of consumers; Q = 7500 -150P


MR=( 7500−2Q ) / 150MC=15
For profit maximization:
MR = MC
( 7500−2Q ) / 150=15
Q = 2625, P = 32.5, Profit = 45937.5
Profit in case 2 is more. Therefore, Mr. Bin will charge 32.5 and cater to both segment type.

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