Question

7.  Jim is the sole provider of lawn mowing in his neighborhood. His cost, including the opportunity cost of his time, of mowing is $60 per acre, regardless of the total area mowed. Assume that demand curve for lawn mowing in the neighborhood is given by P=240 - 5Q, where Q is the number of acres mowed. Further assume that Jim can negotiate the price of service with each homeowner individually so as to maximize his profit, while the homeowners do not talk to each other about their deal with Jim.

(i) What is the term used in economics for this pricing policy?

(ii) What total quantity of service in acres mowed he will provide? What economic profit will he earn? Provide a detailed graph illustrating your solution and showing the area depicting the profit made.

Answer 1

7. (i) This pricing policy is termed as Perfect or First Degree Price Discrimination. Jim can negotiate the price in each home individually, and since the homeowners do not talk to each other about their deal with Jim, the market for mowing is segregated perfectly. Hence, Jim can charge each homeowner their reservation price.

(ii) The marginal cost is . The total quantity would be socially efficient, ie where or or or . Hence, Jim would provide a service of 36 acres. The economic profit can be seen as below.

The profit would be equal to the entire surplus, and since supply is horizontal, the entire consumer surplus. This would be the area of blue shaded triangle as or or dollar.