Price discrimination is the practice of selling a good at different prices to different consumers (Sullivan, Sheffrin, & Perez, 2008, p. 167). A price discrimination strategy that will increase my revenues compared to a single pricing strategy would be to offer a ten percent discount to students and charge full price for other local residents and visitors. Because students typically have lower income, their elasticity of demand is higher and they benefit from lower prices. Moreover, students tend to purchase more food than average residents or visitors. Lower prices for students could stimulate more demand for each student and his/her friends, thereby increasing revenues. The only disadvantage on the consumer end is that visitors and other local residents will face higher prices.
Question 2: Cable TV Industry
In an attempt to prevent the market price for cable from rising above a certain level, the legislature would have to institute a maximum price below the free market price. The price ceiling would create excess demand for cable because the new price would be below the normal equilibrium. Consumers gain from the price set lower than the equilibrium price, but there is eventually a loss of consumer welfare because of decreases in quantities of cable. Producer surplus is reduced to a lower level as well. Overall, the price ceiling creates a net reduction in welfare (see Chart 1 attached).
Question 3: Short and Long-run Effects of Increases and Decreases in Market Supply and Demand
Demand for the product falls, causing decreases in market equilibrium prices in the short- run as well as losses for firms. If demand for the product rises, there will be an increase in market equilibrium price and firm will make short-run gains. In the long-run, if demand increases, new firms will enter and a higher market equilibrium price will be reached. If demand decreases, firms will exit and a lower... [continues]
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