Price discrimination worksheet

1.	Suppose that a cookie producer faces the situation depicted in the diagram to the right for each of its customers.
	a.	If the firm can charge only one price for its cookies, what price will maximize the firm's profits? $______ How large will its profits be? $______
	b.	Now suppose the firm can perfectly price discriminate by charging a different price for each additional cookie. How many cookies should the firm sell? ______ How much should it charge for cookie # (quit when you reach the quantity you recommend): 1___ 2___ 3___ 4___ 5___ 6___ 7___ 8___ 9___ 10___?
	c.	How could the firm achieve the same profits as in part 1b by using a "two-part tariff" instead of a different price for each cookie? That is:
		(1)	what would the price be for each cookie? ______
		(2)	how large a fixed fee would the firm charge? ______
	d.	Suppose that the firm can charge 60 cents for the first 4 cookies and 40 cents for extras beyond 4. Will the firm's profits rise or fall? ______ By how much compared to simple monopoly pricing? _________

The Museum of Fine Arts (MFA) in Boston normally charges $4 for admission. Suppose that the number of MIT students who visit the MFA is given by: Q = 6000 - 1000P and that the marginal cost of additional visitors is 0.

Draw MIT's demand curve in the diagram to the right, and depict the equilibrium situation with the regular $4 admission price.

Why might it be reasonable to assume that MC=0?

Consider two alternative ways of charging MIT students for admission to the MFA:
Option A: Charge the normal price of $4.
Option B: Collect a lump sum payment of $10,000 from MIT (financed by MIT out of student tuition revenues) and grant MIT students free admission.

Complete the following table comparing the two options:

	(1)	(2)	(3)
	Option A	Option B	Change (2) - (1)
Consumer surplus
Producer surplus
Combined (market surplus)

Explain intuitively how it is possible for Option B to make both MIT students and the MFA better off compared to Option A.