Question

1. Consider the following demand for Ross Home Accents’ handmade candles:

Q	P
1	38
2	36
3	34
4	32
5	30
6	28
7	26
8	24
9	22
10	20

Suppose the marginal cost of producing each candle is $10.

(a) Obtain the profit-maximizing single price for Ross Home Accents’ candles and its profit.

(b) From the table above, calculate the consumer surplus obtained by consumers of Ross’ candles. Explain why this consumer surplus constitutes a loss for Ross in the form of money left on the table.

(c) Calculate the loss for Ross in the form of passed-up profit.

(d) Now, imagine Ross discovers that it has the technology to identify consumers and segment them into separate groups and charge them different prices for its product. What kind of price discrimination is Ross engaging in? Pick two possible different prices for two segments and calculate the associated profit for Ross.

(e) Calculate the associated losses (money left on the table and passed-up profit).

(f) Explain the difference you observe between the losses obtained in (e) from price discrimination and those in (b) and (c) when Ross charges a single price.

Answer 1

		Segment 1
		Total Revenue	Marginal Revenue	Marginal Cost	Total Cost	Profit
Demand		TR	MR	MC	TC	PROF		(b)
	Q	P	Q*P				TR-TC		Consumer Surplus
1	38	38		10	10	28
2	36	72	34	10	20	52
3	34	102	30	10	30	72
4	32	128	26	10	40	88
5	30	150	22	10	50	100
6	28	168	18	10	60	108
7	26	182	14	10	70	112	Profit Maximum (a)
8	24	192	10	10	80	112		16
9	22	198	6	10	90	108		36
10	20	200	2	10	100	100		60
								112	Loss for Ross
	MR	Marginal revenue is the revenue a company gains in producing one additional unit of a good.
a	Profit maximizing Single Price is 26 where the max profit of 112 occurs as shown in the above table
b	Consumer surplus = maximum price willing - actual price
	In the above table, the max price willing = 26, hence when Q=8, consumer surplus will be calculated as (26-24)* 8 = 16. Similarly for Q=9 and Q=10 as seen in the table.
	This consitutes a loss for Ross since he could have charged the max price of 26 but he is charging less.
c	The loss for Ross in terms of passed-up profit is the total consumer surplus of 112 as calculated in the table
d	Assuming the original table as segment 1, and the new table below as segment 2. As seen in the segment 2, Ross is engaging in price discrimination by charging higher prices.
	Take example of P=26 for both segments, Ross is able to sell 7 quantity to segment 1 and 8 quantity to segment 2. Profit from segment 1 is 112 and profit from segment 2 is 128
		Segment 2
			Total Revenue	Marginal Revenue	Marginal Cost	Total Cost	Profit
	Demand		TR	MR	MC	TC	PROF
		Q	P	Q*P				TR-TC
	1	40	40		10	10	30
	2	38	76	36	10	20	56
	3	36	108	32	10	30	78
	4	34	136	28	10	40	96
	5	32	160	24	10	50	110
	6	30	180	20	10	60	120
	7	28	196	16	10	70	126
	8	26	208	12	10	80	128
	9	24	216	8	10	90	126
	10	22	220	4	10	100	120