1.

TC=50+25 Q+ 30Q +5 Q

a. fixed cost of producing 10 units of output

Fixed costs will remain unchanged. In the functions the fixed costs are 50
FC=50
b. Variable cost of producing 10 units of output.
2
3
In the function TC=50+25 Q+ 30Q +5 Q the variable cost function is
VC=25Q+30 Q2 +5 Q3 . So the variable cost of producing is
10

TC=25(10)+30
TC=8250

c. Total cost for producing 10 units of output

TC=50+8,250=8,300
d. The average fixed cost of producing 10 units of output.
AFC =50/10=5
e. The marginal cost when Q = 10.
The marginal cost function is

MC=25+60 Q+15 Q2 so the marginal cost is

10
( 2)=25+600+1500=2,125
MC =25+60(10)+15

2. Webster (2003: 34) says Total revenue (TR) is the price of a product times the number
of units sold. TR represents the total flow of income to a firm from selling a given
quantity of output at a given price, less tax going to the government. The value of TR is
found by multiplying price of the product by the quantity sold.
Mankiw (2012:284) says average revenue (AR) is total revenue divided by the amount of
output and it tells how much revenue a firm receives for the typical unit sold. Average

revenue (AR), is revenue per unit and is found by dividing TR by the quantity sold, Q.
P Q
=P
AR is equivalent to the price of the product, where
, hence AR is also price.
Q
Marginal revenue (MR) is the revenue generated from selling one extra unit of a good or
service. It can be found by finding the change in TR following an increase in output of
one unit. MR can be both positive and negative. Baye (2010:283) argues that marginal
revenue is the change in total revenue attributable to the last unit of output; geometrically,
it is the slope of the total revenue curve. The graph below explains the shape of total
revenue, average revenue and marginal revenue.

The graph shows that in the initial stages, as output increases total revenue (TR) also
increases, but at a decreasing rate. It eventually reaches a maximum and then decreases
with further output giving the curve the total revenue curve for a firm with market control
a hump-shape. However, as output increases the average revenue (AR) curve slopes
downwards. The AR curve is also the firms demand curve. The marginal revenue (MR)
curve also slopes downwards, but at twice the rate of AR. This means that when MR is 0,

TR will be at its maximum. Increases in output beyond the point where MR = 0 will lead
to a negative MR.

3.

TC t =80+ 0.75Q2
so MCt=1.5 Q
Residual Demand (for the price leader firm)
Qt=Qd Q s=100+2 P 5 4 P=95 2 P
P=95 / 2 1/2 Qt

TRt=47.5 Q 0.5 Qt
MRt=47.5 Qt
MR=MC ,
47.5 Qt =1.5 Qt
47.5=2.5 Qt
Qt =19units
19 sheets of steel should be produced daily.
2) The firm should charge

P=47.5 0.5(19)=$ 38

3) The output of the whole industry is Qd =100+2 (38 )=176 units

4. a)

Ped=

Q new Q old Pnew Pold

Qnew +Q old P new+ P old

2
2

575325
300500
250 200 250 400

=0.56 (2 ) =1.12
(575+325)/2 (300+500)/2 450 400 450 200

b) Before
Mark up on price=

pricecost 50013 487

=
=
=0.974
price
500
500

After
Mark up on price=

Before

pricecost 30013 287

=
=
=0.957
price
300
300

Mark up on cost=

pricecost 50013 487

=
=
=37.46
Cost
13
13

After
Mark up on price=

pricecost 30013 287

=
=
=22.08
cost
13
13

c) Optimal price
Optimal Price=

MC
13
13
13
=
=
=
=K 118.18
1
1
10.89 0.11
1+
1+
PED
1.12

5. What is meant by price discrimination? What are its objectives? Is price discrimination
anti-social?
According to Samuelson and Marks (2009: 99) price discrimination occurs when a firm sells the
same good or service to different buyers at different prices. The firm sets different prices for
4

different market segments, even though its costs of serving each customer group are the same.
Webster (2003: 419) asserts that for firms with market power, price discrimination refers to the
practice of tailoring a firms pricing practices to fit specific situations for the purpose of
extracting maximum profit. Price discrimination may involve charging different buyers different
prices for the same product or charging the same consumer different prices for different
quantities of the same product. Price discrimination may involve pricing practices that limit the
consumers ability to exercise discretion in the amounts or types of goods and services
purchased. In whatever guise price discrimination is practiced, it is often viewed by the
consumer, when the consumer understands what is going on, as somehow nefarious, or at the
very least unfair.
Price discrimination can only occur if certain conditions are met. These conditions include

The firm must be able to identify different market segments, such as domestic users and

industrial users.
Different segments must have different price elasticity (PEDs).
Markets must be kept separate, either by time, physical distance and nature of use
There must be no seepage between the two markets, which means that a consumer
cannot purchase at the low price in the elastic sub-market and then re-sell to other
consumers in the inelastic sub-market, at a higher price.
The firm must have some degree of monopoly power.
There are three of types of price discrimination first-degree, second-degree and third-degree
price

discrimination.

First-degree discrimination,

alternatively

known

as perfect price

discrimination, occurs when a firm charges a different price for every unit consumed. Firstdegree price discrimination occurs when firms charge each individual a different price for each
unit purchased. The price charged for each unit purchased is based on the sellers knowledge of
each individuals demand curve. Because it is virtually impossible to satisfy this informational
requirement, first-degree price discrimination is extremely rare.
Sometimes referred to as volume discounting, second-degree price discrimination differs from
first-degree price discrimination in the manner in which the firm attempts to extract consumer
surplus. In the case of second- degree price discrimination, sellers attempt to maximize profits by
selling product in blocks or bundles rather than one unit at a time. There are two common
types of second-degree price discrimination: block pricing and commodity bundling.
5

Block pricing, or selling a product in fixed quantities, is similar to first degree price
discrimination in that the seller is trying to maximize profits by extracting all or part of the
buyers consumer surplus. A six-pack of beer is an example of block pricing. The rationale
behind block pricing is to charge a price for the package that approximates, but does not exceed,
the total benefits obtained by the consumer. With block pricing the firm will attempt to get the
consumer to pay for the full value received for the six-pack of beer by charging a single price for
the package.
Another form of second-degree price discrimination is commodity bundling. Commodity
bundling involves combining two or more different products into a single package, which is sold
at a single price. Like block pricing, commodity bundling is an attempt to enhance the firms
profits by extracting at least some consumer surplus. A vacation package offered by a travel
agent that includes airfare, hotel accommodations, meals, entertainment, ground transportation,
and so on is an example of commodity bundling.
Third-degree price discrimination occurs when firms segment the market for a particular good or
service into easily identifiable groups and then charge each group a different price. For example,
for theaters, restaurants and amusement parks to offer senior citizen, student and youth discounts.
For third-degree price discrimination to be effective, a number of conditions must be satisfied.
First, the firm must be able to estimate each groups demand function. A second condition that
must be satisfied for a firm to engage in third degree price discrimination is that members of
each group must be easily identifiable by some distinguishable characteristic, such as age; or
perhaps groups can be identified in terms of the time of the day in which the good or service,
such as movie tickets, is purchased. Finally, for third-degree price discrimination to be successful
it must not be possible for groups purchasing the good or service at a lower price to be able to
resell that good or service to groups changed the higher price.
The objective of price discrimination is to increase revenue by taking advantage of the ability to
pay of different market segments by repackaging or rebranding products to suit their pockets or
by better matching the prices charged with the benefits derived from consumption. Hirschey
(2009:588) argues that by charging higher prices to high-value customers, profits rise without
affecting costs.

The other objective of price discrimination is to efficiently capture customer surplus for the
seller. Precise price discrimination would involve charging the maximum each customer or group
of customers is willing to pay. It actually means charging what the market will bear.

Is price discrimination anti-social? In other words, would the act of price discrimination cause
harm or lack consideration for the well-being of others? The answer is no and yes. This essay
will discuss this subject from the point of view of consumer welfare and producer surplus and
use of profit.
Price discrimination causes some consumers to pay higher prices. These higher prices are likely
to be allocatively inefficient because the price charged is higher than marginal cost (P > MC).
This reduces consumer surplus representing a loss of welfare because for the majority of buyers,
the price charged is well above the marginal cost of supply.
However some consumers who can now buy the product at a lower price may benefit. Lowerincome consumers may be priced into the market if the supplier is willing and able to charge
them less. Good examples might include legal and medical services where charges are dependent
on income levels. Greater access to these services may yield external benefits or positive
externalities that then affect social welfare and equity. Drugs companies might justify selling
their products at inflated prices in countries where incomes are higher because they can then sell
the same drugs to patients in poorer countries.
Price discrimination benefits businesses through higher profits. A discriminating monopoly is
extracts consumer surplus and turns it into supernormal profit. Price discrimination also might be
used as a predatory pricing tactic to harm competition at the suppliers level and increase a firms
market power. A counter argument to this is that price discrimination might be a way of making a
market more contestable. For example, the low cost airlines have been hugely successful by
using price discrimination to fill their planes.
Profits made in one market may allow firms to cross-subsidize loss-making activities that have
important social benefits. For example money made on commuter rail or bus services may allow
7

transport companies to support loss-making rural services. Without the ability to price
discriminate, these services may have to be withdrawn and jobs might suffer. In many cases,
aggressive price discrimination is a means of business survival during a recession. An increase in
total output resulting from selling extra units at a lower price might help a monopoly to exploit
economies of scale thereby reducing long run average costs.

References
Baye M.R. (2010), Managerial Economics and Business strategy. New York: McGraw-Hill.
Hirschey M. (2009), Fundamentals of Managerial Economics, 9th Edition, Australia: Cengage
Learning
Mwankiw N.G. (2012) Principles of Microeconomics 6th Edition, USA: Cengage Learning
Samuelson W.F. and Marks S.G. (2012), Managerial Economics 7th Edition, USA: John Wiley &
Sons Inc.
Webster T.J., (2003), Managerial Economics Theory and Practice, Amsterdam: Academic Press
Riley G. (2011), A2 Micro: Consequences of Price Discrimination;

http://www.tutor2u.net/economics/blog/a2-micro-consequences-of-price-discrimination
Retrieved 22/01/16