PRICE DISCRIMINATION.

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Presentation transcript:

PRICE DISCRIMINATION

Price- discrimination Definition: price discrimination is the act of charging different customers different price for the same good or service. Examples: A common example of price discrimination is ladies' night: men must pay full price for drinks at the bar, but women pay only 50% of the regular price.

Demand functions: Definition: A demand function that represents the behavior of buyers, can be constructed for an individual or a group of buyers in a market. The market demand function is the horizontal summation of the individuals' demand functions. In models of firm behavior, the demand for a firm's product can be constructed. Example:

Marginal cost： Definition: Marginal Cost is an increase in total cost that results from a one unit increase in output. It is defined as:” The cost that results from a one unit change in the production rate". Example: The total cost of producing one pen is $5 and the total cost of producing two pens is $9, then the marginal cost of expanding output by one unit is $4 only (9 - 5 = 4). The marginal cost of the second unit is the difference between the total cost of the second unit and total cost of the first unit. The marginal cost of the 5th unit is $5. It is the difference between the total cost of the 6th unit and the total cost of the, 5th unit and so forth. Marginal Cost is governed only by variable cost which changes with changes in output. Marginal cost which is really an incremental cost can be expressed in symbols. Graph:

Example 5.8 1. A price-discriminating monopoly sells in two markets whose demand functions are q₁=160-10p₁ and q₂=240-20p₂ and it faces the marginal cost schedule MC=1.2+0.02q, where q=q₁+q₂. How much should it sell in each market, and at what prices, in order to maximize profits? MR=MC

Solution q₁=160-10p₁ q₂=240-20p₂ so p₁=16-0.1q₁ p₂=12-0.05q₂ Then MR₁=16-0.2q₁ MR₂=12-0.1q₂ q₁=80-5MR₁ q₂=120-10MR₂ For profit maximization, MR₁= MR₂= MR q=q₁+q₂= 80-5MR₁+120-10MR₂=200-15MR And so MR= 40 3 − 1 15 q MR=MC 40 3 − 1 15 q=1.2+0.02q q=140, MR=4 q₁=60 q₂=80 p₁=10 p₂=8 MR=TR’