You Have 10 Individuals with Values {$1,$2,$3,$4,$5,$6,$7,$8,$9,$10},and Suppose You Find

question 178

Essay

You have 10 individuals with values {$1,$2,$3,$4,$5,$6,$7,$8,$9,$10},and suppose you find a way to charge one price to the consumers whose values are {$1,$2,$3,$4,$5},and a different price to those consumers whose values are {$6,$7,$8,$9,$10}.MC of production is $2.50.
a.What price should you charge to the second group?
b.What are your expected profits from selling to the second group?
c.What price should you charge to the first group?
d.If it costs $5 to implement this price-discrimination scheme (to identify the two groups and prevent arbitrage between them),should you do it?

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Definitions:

Diseconomies of Scale

The phenomenon where an increase in production leads to higher costs per unit due to inefficiencies that arise from scaling up operations.

Increasing Returns

An increase in a firm’s output by a larger percentage than the percentage increase in its inputs.

Diminishing Returns

A principle stating that after a certain point, additional investment or effort yields progressively smaller increases in output.

Marginal-cost Curve

The marginal-cost curve represents how the cost of producing one additional unit of a good changes as its production volume varies.