Question 26 Not yet answered Points out of 1.00 customers are locals who cannot
ID: 1146690 • Letter: Q
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Question 26 Not yet answered Points out of 1.00 customers are locals who cannot get gasoline anywhere else in town and are, on average, willing to pay Percy runs the only gasoline station in Indio Valley. Some of his customers are visitors passing through Indio and are therefore not willing to pay much for gas since they can get gas elsewhere during their trip. 50 visitors are willing to pay up to $4 per gallon of gas, and 100 visitors are willing to pay up to $3. Some of his P Flag questionmore: 90 locals are willing to pay $5 per gallon, 10 are willing to pay $4 and 10 are willing to pay $2. Percy can supply gas a constant marginal cost of $1 and he has no fixed costs. Percy has always had to set one price for gasoline (by the gallon) and charge it to everyone, but a new town ordinance allows different prices for gas to visitors versus locals. If Percy sets prices to maximize his profits discriminate between visitors and locals, how does the change in the law change outcomes? Percy to charge Select one: a. Total surplus decreases by $30 and the price to locals goes up by $2. b. The price to locals goes up $2 and the price to visitors goes up by $1 c. Total surplus decreases by $140 and the price to locals goes up by $2. , d. The price to locals goes up by $1 and the price to visitors stays the same. e. Total surplus increases by $30 and the price to locals goes up by $2.Explanation / Answer
Option A is correct
Previously he was charging a single price of $3 which had a revenue of (50 + 100)*3 = $450 from visitors and (90 + 10)*3 = $300. Cost of production will be 250*1 = 250 and so profit is $750 - 250 = $500. Consumer surplus is 50*(4-3) + 90*(5-3) + 10*(4-3) = 240. Hence total surplus is $740
When price discrimination is allowed, locals will now be charged by $5 and visitors will be charged at $3. This implies new revenue is (50 + 100)*3 = $450 from visitors and 90*5 = $450. Cost of production will be 240*1 = 240 and so profit is $900 - 240 = $660. Consumer surplus is now 50*(4-3) = $50. Total surplus is now $660 + $50 = $710. Hence total surplus decreases by $30.
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