Question

The graph below shows the demand for haircuts at the Uppercuts Hairdressing Salon. Tools 30 27 24 Captured con 21 18 15 12 20 40 60 80 100 120 Number of daily haircuts a) If the salon charges a single price of $15, what will total daily revenue be? Total daily revenue: S b. b) Suppose, instead, that the salon practises price discrimination and now charges $21 for haircuts to regulars but only $15 to retirees and economics instructors. What will its new total daily revenue be? New total daily revenue: $ c) What is the value of consumer surplus that the salon has captured as a result of price discriminating? Consumer surplus: $ d. In the above graph, show the area that represents the value of consumer surplus captured. Plot only the 4 endpoints of the area. Price per haircut

Answer 1

Answer : a) At $15 price level the quantity demanded is 60.

Total revenue = Price * Quantity = 15 * 60 = $900.

Therefore, at $15 price level the daily total revenue is $900.

b) At $21 price level the quantity demanded is 30.

Total revenue at $21 = 21 * 30 = $630.

At $15 the total revenue = $900.

So, in price discrimination the total daily revenue = Total revenue at $15 + Total revenue at $21 = 900 + 630 = $1,530.

Therefore, the new daily total revenue is $1,530.

c) At $21 price level for consumer surplus :

Height = Willingness to pay - Actual payment = 27 - 21 = 6

Base = Quantity demanded = 30

Consumer surplus = 0.5 * Height * Base = 0.5 * 6 * 30 = $90.

At $15 price level for consumer surplus :

Height = 27 - 15 = 12

Base = 60

Consumer surplus = 0.5 * Height * Base = 0.5 * 12 * 60 = $360

The value of captured consumer surplus = $360 - $90 = $270.

Therefore, in price discrimination the value of captured consumer surplus is $270.

d) In the following picture's diagram the area of captured consumer surplus is shown by the shaded area.

21 conswner Sunplas anea 15 Captured Number of daily haireuds Pri ce per haircnk