Price Discrimination In-Class Examples

1. Electric utilities often practice second-degree price discrimination. Why might this improve
consumer welfare?
2. How is peak-load pricing a form of price discrimination? Can it make consumers etter off?
!ive an e"ample.
#. !ive some e"amples of third degree price discrimination. Can third-degree price
discrimination e effective if consumers have different levels of demand ut the same
elasticities?
$. %rice discrimination re&uires the aility to sort customers and the aility to prevent aritrage.
E"plain how the following can function as price discrimination and discuss oth 'sorting(
and 'aritrage( in your answer.
a) *elling food processors along with coupons that can e sent to the manufacturer to otain
a +1, reate.
) -ffering temporary price cuts on athroom tissue.
.. Eli/aeth 0irlines 1E0) flies one route2 Chicago-Honolulu. 3he demand for each flight on
this route is % 4 .,, 5 67 and 89 4 .,, 5 26. E0:s cost of running each flight is +#,7,,,
plus +1,, per passenger.
a) What is the profit-ma"imi/ing price E0 will charge? How many people will fly?
What is E0:s profit for each flight?
) E0 learns that the fi"ed costs per flight are actually +$17,,, and not +#,7,,,. Will the
airline e e"pected to stay in usiness long? ;llustrate your answer using a graph of
the demand curve that E0 faces7 E0:s average cost curve when fi"ed costs are
+#,7,,, and E0:s average cost curve when fi"ed costs are +$17,,,.
c) E0 now finds out that two different types of people fly to Honolulu. 3ype 0 is
usiness people with a demand of %a 4 <., 5 2..6a7 and 89a 4 <., 5 .6a. 3ype = is
students whose demand is % 4 $,, 5 1.<>67 with 89 4 $,, 5 #.#$6. E0 decides
to charge the students a different price. What price does E0 charge the students? 0nd
the usiness travelers? How many of each type are on each flight?
d) What is E0:s profit and will it stay in usiness?