Question

1. Sometimes consumers don’t face the same prices. For example, a movie theater may offer cheaper tickets to senior citizens, or local restaurants may provide student discounts. How would different prices charged to different people change our model of the consumer problem? Would people end up at points on the ICs with the same slope upon solving their consumer problems? If not, why wouldn’t they be able to improve themselves through mutually beneficial trades (keeping in mind the movie ticket and meal examples provided above)?

Answer 1

Different prices charged means the budget constraint changes for each customer . Now we know that utility maximization depends upon the slope of budget constraint and slope of indifference curve . Different prices means slope of budget constraint changes , so utility maximization point is different for different consumers . Those facing lower prices are at higher indifference curves , vice versa .

No people will end up on the ICs with different slopes since price changes means slope of budget constraint changes and not just shift of budget constraint with same slope .

Such price discrimination is practiced for people with different willingness to pay or different reservation prices . In case of meals , a student getting meals at cheaper prices will not be willing to trade with someone who is paying higher price for the meal or average out the difference in price . This is because a student has lower reservation price for the meal .