firms to sell to at the higher price. This would be
detrimental for the firm, so a successful price-
discriminating firm must be able to prevent resale.
4. In economics, the most socially desirable level of
output is producing where MC “ D. This means
that the last unit costs exactly as much as the
ever, this is still the point where surplus is maxi-
mized. While people may care (normatively)
about how this surplus should be divided, effi-
ciency only describes the optimal output level,
not some optimal surplus division.
Hints and Common Errors: Because we are
usually consumers long before we are producers,
people generally worry a lot about consumer
surplus. But look on the other side: suppose all
Customer Willingness to Pay Age Price TR MR
Becky 11 34 11 11 11
Erin 6 9 6 42 6
Questions for Review
1. In order to price discriminate successfully, a firm
must be able to do the following:
fi The firm must be able to distinguish between
groups of consumers that have dif fer ent elas-
prices to dif fer ent groups of people based on what
days they y and where they are going. Also, in
order to price discriminate, the firm must be able
to prevent resale; other wise, there would be a
moneymaking (or arbitrage) opportunity for
those who can buy at the lower price and resell
those goods for a slightly higher price.
2. When economists think about efficiency, they are
asking the question, “Is the number of goods
being produced the optimal number?” For effi-
3. Imagine a price- discriminating firm that is unable
to prevent resale of the good. Suppose this firm
sells homemade apple pies to students for $5 per
pie and charges a price of $12 per pie for all other
consumers can take advantage of the lower price
and then resell the goods on the secondary market,
then there are fewer (if any) consumers left for the
Solutions to Chapterfi11 Text Prob lems
d. This is an example of price discrimination. The
store discriminates based on those who are
willing to pay top dollar for current models
versus those who are more price sensitive and
who pay less for an older model.
who would like to get to the park early and would
not be willing to spend only an hour or two
there. However, there are other types of people
who have more elastic demand. These people
4. fi Hardcover books versus paperbacks: Hard-
cover books almost always come out several
weeks or months before a paperback version of
fi Cell phones: When new cell phone models
come out, older versions become much cheaper
(e.g., the iPhone). Those who want the latest
new gadget will pay the full price for a new
model. Those who are more patient can usually
The price is the highest price the customer with
the lowest valuation is willing to pay. The total
revenue is calculated by multiplying the number
of customers who are willing to pay that amount
by the price. The marginal revenue is the
it will lose David’s business if it charges $9. If it
charges $7 instead, this is a pretty low price.
So, the firm should target Becky and Franco for
one price and every one else for another price.
$42. Instead, if it charges two prices according
to willingness to pay, it will sell two tickets at
$10 and five tickets at $6. This will get the
2. a. Even though this is offered to all customers,
this is still an example of price discrimination.
Those who use the cell phones for mostly per–
sonal use will prob ably not use as many min-
utes during the week. Instead, they will try to
improving effect of price discrimination. As
shown in this example, both higher– priced and
lower- priced hotels are sold!
10. Surge pricing is a form of price discrimination.
Charging the higher price all the time could hurt
ridership numbers, because much of the time,
riders will be sensitive to price. But during times
of peak demand, a disproportionate number of
riders will need transportation quickly and will
not be in a position to wait for a cheaper ride.
want the latest fashions and those who have a
more elastic demand and are only willing to
buy designer clothes on sale.
8. Definitely! One of the ways firms practice price
discrimination is with the ability to charge dif–
fer ent prices for dif fer ent customers according to
their willingness to pay. PC users typically pay
much lower prices for their computers than Apple
users, which reveals their willingness to pay. So
in this case, Apple users may not view slightly