Chapter 11, Problem 1RQ

To determine

First degree price discrimination and the lowest price and output in the market.

Explanation of Solution

Price discrimination is the process of charging different prices for the same commodity from different consumers or on different quantities of the product in the market. The first degree price discrimination is the practice of selling each unit of the commodity at the reservation price of each consumer. This means that the consumer purchases the product at the reservation price of the consumer, which denotes that the marginal revenue will be equal to the price of the commodity sold in the market.

Since the marginal revenue equals the price in the case of the first degree price discrimination, the demand curve of the firm will be the same as the marginal revenue curve of the firm. Thus, the MR = MC will give the profit-maximizing output of the firm in the market. This is obtained at the point where the MC curve intersects the demand curve of the firm. Therefore, the MC will be equal to the price of the last unit sold in the market.

Economics Concept Introduction

Price discrimination: The price discrimination is the practice of charging different prices for the exact same commodity from different consumers or for different quantities of the product consumed in the market.