SHOW HOW A FIRM CAN MAXIMIZE TOTAL REVENUE BY PRICE DISCRIMINATING

Expert Solution

Answer : Let the firm's total output level is 10 units. Without price discrimination the firm sells each unit at $10 price level. So, firm's total revenue = price * quantity = 10 * 10 = $100.

In price discrimination the firm is able to charge different prices to different consumers. Let the firm sells 5 units of total output at the price of $10 to a group of consumers and the firm sells other 5 units of total output at the price of $15 to another group of consumers. So, for first group of consumers the firm's total revenue = 10 * 5 = $50. For another group of consumers the firm's total revenue = 15 * 5 = $75. Therefore , in price discrimination the firm's total revenue = 50 + 75 = $125.

Now, we can see that the firm's total revenue is maximum for price discrimination. So, the firm can get maximum total revenue of $125 by using the price discrimination strategy.

Thus, a firm can earn maximum total revenue by using price discrimination strategy.

Rahul Sunny answered 1 year ago

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