/*! This file is auto-generated */ .wp-block-button__link{color:#fff;background-color:#32373c;border-radius:9999px;box-shadow:none;text-decoration:none;padding:calc(.667em + 2px) calc(1.333em + 2px);font-size:1.125em}.wp-block-file__button{background:#32373c;color:#fff;text-decoration:none} Problem 1 Price discrimination requires th... [FREE SOLUTION] | 91影视

91影视

Log out

Learning Materials

Features

Discover

Chapter 11: Problem 1

Price discrimination requires the ability to sort customers and the ability to prevent arbitrage. Explain how the following can function as price discrimination schemes and discuss both sorting and arbitrage: a. Requiring airline travelers to spend at least one Saturday night away from home to qualify for a low fare. b. Insisting on delivering cement to buyers and basing prices on buyers' locations. c. Selling food processors along with coupons that can be sent to the manufacturer for a \(\$ 10\) rebate. d. Offering temporary price cuts on bathroom tissue. e. Charging high-income patients more than lowincome patients for plastic surgery.

Short Answer

Expert verified
Price discrimination schemes aim to capture more profit by charging different prices to different customers. The given business strategies all sort customers, identify their willingness to pay, and create barriers to prevent arbitrage. The goal of these strategies is to maximize profit by capturing more consumer surplus.

Step by step solution

01

Understand Price Discrimination

Price discrimination occurs when a seller charges different prices to different consumers for the same good or service, when the price differences can't be justified by cost differences. The goal is to capture consumer surplus and turn it into additional producer surplus or profit.
02

Explaining Situations: Airline Travelers

The airline insists that travelers spend at least one Saturday night away from home to qualify for a low fare. This is a price discrimination scheme as it sorts consumers based on their willingness and ability to stay over the weekend. Business travelers typically want to return home before the weekend and are less price-sensitive, whereas leisure travelers are more likely to stay over the weekend and are more price-sensitive. This scheme also prevents arbitrage as the ticket is non-transferable.
03

Explaining Situations: Cement Delivery

Sellers insist on delivering cement to buyers and base prices on buyers' locations. This is price discrimination as it sorts consumers based on their locations. Those in remote locations might be charged more due to the higher cost of delivery, and they're less likely to arbitrage due to the cost and practicality of re-selling and delivering cement.
04

Explaining Situations: Food Processors and Coupons

Selling food processors with coupons that can be sent for a rebate is price discrimination. The manufacturer sorts the customers based on their willingness to spend time to send the coupons for rebate. More price-sensitive consumers are more likely to send the coupons. The arbitrage is prevented as the coupon is valid only with a proof of purchase.
05

Explaining Situations: Price cuts on bathroom tissue

Offering temporary price cuts on bathroom tissue is a form of price discrimination. It sorts customers based on their ability and willingness to stock up during sales. More price-sensitive consumers are more likely to do this. The arbitrage is limited due to the practicality of reselling bathroom tissue.
06

Explaining Situations: Plastic surgery for high and low income patients

Charging high-income patients more than lowincome patients for plastic surgery is price discrimination. It sorts customers based on their income levels, assuming high-income individuals are less sensitive to price. The arbitrage is minimal as reselling medical procedures is not feasible.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Over 30 million students worldwide already upgrade their learning with 91影视!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

As the owner of the only tennis club in an isolated wealthy community, you must decide on membership dues and fees for court time, There are two types of tennis players. "Serious" players have demand $$Q_{1}=10-P$$ where \(Q_{1}\) is court hours per week and \(P\) is the fee per hour for each individual player. There are also "occasional" players with demand $$Q_{2}=4-0.25 P$$ Assume that there are 1000 players of each type. Because you have plenty of courts, the marginal cost of court time is zero. You have fixed costs of \(\$ 10,000\) per week. Serious and occasional players look alike, so you must charge them the same prices. a. Suppose that to maintain a "professional" atmosphere, you want to limit membership to serious players. How should you set the anmul membership dues and court fees (assume 52 weeks per year) to maximize profits, keeping in mind the constraint that only serious players choose to join? What would profits be (per week)? b. A friend tells you that you could make greater profits by encouraging both types of players to join. Is your friend right? What annual dues and court fees would maximize weekly profits? What would these profits be? c. Suppose that over the years, young, upwardly mobile professionals move to your community, all of whom are serious players. You believe there are now 3000 serious players and 1000 occasional players. Would it still be profitable to cater to the occasional player? What would be the profitmaximizing annual dues and court fees? What would profits be per week?

Some years ago, an article appeared in the New York Times about IBM's pricing policy. The previous day, IBM had announced major price cuts on most of its small and medium-sized computers. The article said: IBM probably has no choice but to cut prices periodically to get its customers to purchase more and lease less. If they succeed, this could make life more difficult for IBM's major competitors. Outright purchases of computers are needed for ever larger IBM revenues and profits, says Morgan Stanley's Ulric Weil in his new book, Information Systems in the \(80^{\circ}\) s. Mr. Weil declares that IBM cannot revert to an emphasis on leasing. a. Provide a brief but clear argument in support of the claim that IBM should try "to get its customers to purchase more and lease less." b. Provide a brief but clear argument against this claim. c. What factors determine whether leasing or selling is preferable for a company like IBM? Explain briefly.

A monopolist is deciding how to allocate output between two geographically separated markets (East Coast and Midwest), Demand and marginal revenue for the two markets are $$\begin{array}{ll}P_{1}=15-Q_{1} & \mathrm{MR}_{1}=15-2 Q_{1} \\ P_{2}=25-2 Q_{2} & \mathrm{MR}_{2}=25-4 Q_{2}\end{array}$$ The monopolist's total cost is \(C=5+3\left(Q_{1}+Q_{2}\right)\) What are price, output, profits, marginal revenues, and deadweight loss (i) if the monopolist can price discriminate? (ii) if the law prohibits charging different prices in the two regions?

Elizabeth Airlines (EA) flies only one route: ChicagoHonolulu. The demand for each flight is \(Q=500-P\) EA's cost of running each flight is \(\$ 30,000\) plus \(\$ 100\) per passenger. a. What is the profit-maximizing price that EA will charge? How many people will be on each flight? What is EA's profit for each flight? b. EA learns that the fixed costs per flight are in fact \(\$ 41,000\) instead of \(\$ 30,000 .\) Will the airline stay in business for long? Illustrate your answer using a graph of the demand curve that EA faces, EA's average cost curve when fixed costs are \(\$ 30,000,\) and EA's average cost curve when fixed costs are \(\$ 41,000\) c. Wait! EA finds out that two different types of people fly to Honolulu. Type \(A\) consists of business people with a demand of \(Q_{\lambda}=260-0.4 P\). Type \(B\) consists of students whose total demand is \(Q_{\mathrm{B}}=240-0.6 P\) Because the students are easy to spot, EA decides to charge them different prices. Graph each of these demand curves and their horizontal sum. What price does EA charge the students? What price does it charge other customers? How many of each type are on each flight? d. What would EA's profit be for each flight? Would the airline stay in business? Calculate the consumer surplus of each consumer group. What is the total consumer surplus? e. Before EA started price discriminating, how much consumer surplus was the Type \(A\) demand getting from air travel to Honolulu? Type \(B\) ? Why did total consumer surplus decline with price discrimination, even though total quantity sold remained unchanged?

Suppose that BMW can produce any quantity of cars at a constant marginal cost equal to \(\$ 20,000\) and a fixed cost of \(\$ 10\) billion. You are asked to advise the CEO as to what prices and quantities BMW should set for sales in Europe and in the United States, The demand for BMWs in each market is given by $$Q_{E}=4,000,000-100 P_{E}$$ and $$Q_{u}=1,000,000-20 P_{\mathrm{U}}$$ where the subscript \(E\) denotes Europe, the subscript \(u\) denotes the United States. Assume that BMW can restrict U.S. sales to authorized BMW dealers only. a. What quantity of BMWs should the firm sell in each market, and what should the price be in each market? What should the total profit be? b. If \(\mathrm{BMW}\) were forced to charge the same price in each market, what would be the quantity sold in each market, the equilibrium price, and the company's profit?
See all solutions

Recommended explanations on Economics Textbooks

Taxation Economics

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.