Price discrimination worksheet

	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_____?
b.	How large will each of the following be? TR: $______ TC: $______ Profits $______
c.	Shade in the area that corresponds to the profits earned under first-degree price discrimination.

d.	First-degree price discrimination using "two-part tariff":
	Step 1:	Produce the efficient quantity (Q): Q = ______
	Step 2:	Set price equal to marginal cost at Q*: Cookie price = ______
	Step 3:	Charge an access fee equal to consumer surplus at Q*: Cafe cover charge = ______

2.	Second-degree price discrimination: Suppose that the cafe can charge 60 cents for the first 4 cookies and 40 cents for extras beyond 4.
	a.	Will the cafe's profits rise or fall compared to simple monopoly? ______ By how much? _________
	b.	Illustrate the cafe's price schedule in the diagram to the right.
	c.	Shade in (1) the change in profits and (2) the change in consumer surplus compared to simple monopoly pricing.

Third-degree price discrimination: Pasadena Car Wash has two groups of customers: adults and seniors, each with a constant price elasticity of demand.

What is the formula for a monopoly's markup pricing rule?

The marginal cost of washing each car is $4. How much should Pasadena Car Wash charge each group of customers?

	Elasticity	Price
Senior citizens	2
Other customers	5/3

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)

How is it possible for Option B to make both MIT students and the MFA better off compared to Option A?

Suppose that a cookie cafe faces the situation depicted in the diagram to the right for each of its customers.
	Simple monopoly: Suppose the cafe can charge only one price for its cookies: What price will maximize the firm's profits? $______ How large will its profits be? $______
1.	First-degree price discrimination:
	a.	Now suppose that the cafe can perfectly price discriminate by charging a different price for each additional cookie. How many cookies should the cafe sell? ______