Question

4. Consider the followin each selling to two diffe price per unit charged ea ducing each unit for the different marginal costs be following data from three different firms (1, 2 and 3). two different customers (A and B). Shown are the unit charged each customer and the marginal cost of pro- unit for the customer. (Thus, for example, Firm 1 has rginal costs between customers and charges different prices.) Girms are engaged in price discrimination? Explain. Extra For each firm, rank-order the elasticity of demand of the two Which firms are engaged credit: For each for customers. Customer A Customer B 100 150 150 100 Firm 1 Price ($) Marginal cost ($) Firm 2 Price ($) Marginal cost ($) Firm 3 Price ($) Marginal cost ($) 200 100 200 150 150 200 100 100

Answer 1

Answer:

Price discrimination by a company is a situation where the company charges different prices from different customers though the marginal cost (MC) is the same across customers, or when the company charges same price from all the customers though the MC is different across the customers. The main reason why a company indulges in price discrimination is to maximize profit by extracting the most from those who are willing to pay higher prices.

Now we have been given the following information Customer A Customer B Firm 1 Price ($) 100 150 Marginal Cost ($) 100 Firm 2 Price ($) 200 200 Marginal Cost ($) 100

Firm 3 Price ($) 150 200 Marginal Cost ($) 100 100

In the above case, Firm 2 and Firm 3 are doing price discrimination The reason being that Firm 2 is charging the same price ($200) from both A and B despite the fact that in the case of customer A the MC is $100, and in the case of customer B the MC is $150. On the other hand, in the case of Firm 3, the MC for both customer A and B is the same ($100), however the firm is charging $150 from customer A and $200 from customer B. Therefore, both the firms 2 and 3 are indulging in price discrimination.

Firm 1 is not indulging in price discrimination as the MC is equal to the price for both the customers.

Now the appropriate formula for the calculation of the elasticity of demand in the present case is given as following Where P is the price, MC is the marginal cost, and E is the elasticity of demand. The above formula is used by the firms for undertaking cost plus pricing taking into consideration the elasticity of demand. Now let us take each firm one by one.

Similarly, for customer B, the price and the MC are $150 and $150 respectively. Therefore, the eleasticity of demand is given as following. We have P=$150, and MC = $150 Therefore, we have This means that the eleasticity of demand is infinite.

Firm 2: For customer A, the price and MC is $200 and $100 respectively. Therefore, the eleasticity of demand is given as following We have P= $200, and MC = $100 So we have 25 (E-1)

2E-2=E E = 2 Therefore, the elasticity of demand is 2 in the case of customer A.

Similarly, for customer B, the price and MC is $200 and $150 respectively. Therefore, the eleasticity of demand is given as following. We have P= $200, and MC = $150 Therefore, we have 1.33

1.33E-1.33=E .33E = 1.33 E = 4.03 Therefore, the elasticity of demand is 4.03 in the case of customer B. Firm 3: For customer A, the price and MC is $150 and $100 respectively Therefore, the eleasticity of demand is given as following. We have P=$150, and MC = $100

Therefore, we have 1.5= 1E=1) 1.5E-1.5=E E=3 Therefore, the elasticity of demand is 3 in the case of customer A.

Similarly, for customer B, the price and MC is $200 and $100 respectively. Therefore, the eleasticity of demand is given as following. We have P= $200, and MC = $100 Therefore, we have

2E - 2 = E E = 2 Therefore, the elasticity of demand is two in the case of customer B.