Additional Profit from Perfect First Degree Price Discrimination Without price discrimination output is Q* and price is P S/Q P Variable profit is the area max between the MC&MR(yellow). Consumersurplus is the area above P* and bety 0 and Q* outpt MC With perfect discrimination, each consumer pays the maximum price they are willing to pa DE AR Output expands to Q** and price falls to Pc where MC= MREAR= D Profits increase by the area above Mc between old MR and d to output MR Q**(purple) Q** Quanti Chapter 1 Slide 11
Chapter 11 Slide 11 P* Q* Without price discrimination, output is Q* and price is P*. Variable profit is the area between the MC & MR (yellow). Additional Profit From Perfect FirstDegree Price Discrimination Quantity $/Q Pmax With perfect discrimination, each consumer pays the maximum price they are willing to pay. Consumer surplus is the area above P* and between 0 and Q* output. D = AR MR MC Output expands to Q** and price falls to PC where MC = MR = AR = D. Profits increase by the area above MC between old MR and D to output Q** (purple) Q** PC
Additional Profit from Perfect First Degree Price Discrimination With perfect discrimination Each customer pays their reservation price S/Q Consumer surplus when a .Profits increase max single price P* is charged Variable profit when a single price P* is charged MC Additional profit from perfect price discrimination D〓AR MR Quantity Chapter 11 Slide 12
Chapter 11 Slide 12 P* Q* Consumer surplus when a single price P* is charged. Variable profit when a single price P* is charged. Additional profit from perfect price discrimination Quantity $/Q Pmax D = AR MR MC Q** PC With perfect discrimination • Each customer pays their reservation price •Profits increase Additional Profit From Perfect FirstDegree Price Discrimination
Additional Profit from Perfect First Degree Price Discrimination ■ Question o Why would a producer have difficulty achieving first-degree price discrimination? ■ Answer 1)Too many customers(impractical) 2) Could not estimate the reservation price for each customer Chapter 11 Slide 13
Chapter 11 Slide 13 ◼ Question ⚫ Why would a producer have difficulty in achieving first-degree price discrimination? ◼ Answer 1) Too many customers (impractical) 2) Could not estimate the reservation price for each customer Additional Profit From Perfect FirstDegree Price Discrimination
Price discrimination a First Degree Price Discrimination The model does demonstrate the potential profit(incentive) of practicing price discrimination to some degree Chapter 11 Slide 14
Chapter 11 Slide 14 Price Discrimination ◼ First Degree Price Discrimination ⚫ The model does demonstrate the potential profit (incentive) of practicing price discrimination to some degree
Price discrimination a First Degree Price Discrimination EXamples of imperfect price discrimination where the seller has the ability to segregate the market to some extent and charge different prices for the same product e Lawyers, doctors, accountants Car salesperson(15% profit margin Colleges and universities Chapter 11 Slide 15
Chapter 11 Slide 15 Price Discrimination ◼ First Degree Price Discrimination ⚫ Examples of imperfect price discrimination where the seller has the ability to segregate the market to some extent and charge different prices for the same product: ◆Lawyers, doctors, accountants ◆Car salesperson (15% profit margin) ◆Colleges and universities