6. Price-discriminating firm Maria owns a plot of land in the desert that isn\'t

Question

6. Price-discriminating firm Maria owns a plot of land in the desert that isn't worth much. One day, a giant meteor falls on her property. The event attracts scientists and tourists, and Maria decides to sell nontransferable admission tickets to the meteor crater to both types of visitors: scientists (Market A) and tourists (Market B) The following graphs show demand (D) curves and marginal revenue (MR) curves for the two markets. Maria's marginal cost of providing admission tickets is zero Market A Market B 10 4 MR MR D 0 1 2 3 4 5 6 7 8 9 10 QUANTITY (Admission tickets per day) 0 1 2 3 4 5 6 78 9 10 QUANTITY (Admission tickets per day)

Explanation / Answer

Suppose that at first, Maria charges the same price of $4 per admission in both markets so that the total number of admissions demanded is where P=MC in both the markets . We can see from the question figure: from the market A , P=MC =$4 , at this quantity = 6 admissions . And from the market B , P=MC =$ 4, at this quantity = 2 admissions.

Therefore, total number of admissions demanded = (6+2) = 8 admissions.

Suppose now that Maria decides to charge a different price in each market . To maximise revenue Maria should charge a price where MR=MC, so the price = $7 per admission in market A and $5 per admission in market B.

So, at these prices she will sell the total quantity of quantity of (admissions in market A + admissions in market B) = At $ 7 in market A , quantity of admissions = 3 and At $5 in market B , quantity of admissions = 1.

Therefore , she will sell a total quantity of (3+1) = 4 admission tickets per day.

When price policy is non discriminatory then P=MC , at this P=$4 . And as got earlier that quantity of admission sin market A =6 and in market B = 2 . So, the total revenue= ($4)(6) + ($4)(2) = $(24 + 8) = $32.

When price policy is discrimiatory, as we got earlier that in market A , Maria will charge =$7 and then quantity of admissions = 3 . In market B, Maria will charge = $5 and then quantity of admissions = 1 .

So, the total revenue = ($7)(3) +($5)(1) = $(21 +5) = $26.

Maria charges a lower price in the market with a relatively low price elasticity of demand.

Price policy Total revenue Non -discriminatory $ 32 Discriminatory $ 26

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