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16. Imagine that a firm’s customer base can be segmented into two groups, A and B,...

16. Imagine that a firm’s customer base can be segmented into two groups, A and B, which display different degrees of price sensitivity toward your product. The demand curves for these two groups are as follows: Group A Demand: Qa = 16 – 0.2Pa Group B Demand: Qb = 9 – 0.05Pb This firm’s costs are given by: TC = 100 + 20Q, regardless of who buys the product. a. Compare each group in terms of their willingness to pay for the good and their price sensitivity. Intermediate Microeconomics Problem Set 5 Page 4

b. Calculate the amount of output that will be sold to each group as well as the price charged to each group if the firm practices ordinary (3rd degree) price discrimination.

c. Calculate the total profit for this firm that is practicing 3 rd degree price discrimination.

d. Suppose that this firm can no longer distinguish customers in group A from those in group B. Calculate the change in the firm’s profit if it must practice uniform pricing.

e. Now suppose that the firm has found a way to utilize first-degree price discrimination. What is the consumer surplus in this case? Compare this to the consumer surplus when the firm practices 3rd degree and when it practices 1 st degree price discrimination?

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