If you’re like some college students, you are always worried about having enough
ID: 1102447 • Letter: I
Question
If you’re like some college students, you are always worried about having enough money. Suppose that you decide to become an Uber driver, and you offer rides to students on weekends. For a fee, you will drive them to parties and pick them up at the end of the night. Your marginal cost per ride is $10. To keep things simple, assume you are the only person providing this service; that is, you’re a monopolist. On any given weekend, there are six customers who want a ride—three men and three women. The table below shows the most each person is willing to pay for a ride.
How much profit would you earn if you practiced perfect price discrimination?
Customer Maximum willingness to pay John $70 Mary 60 Peter 50 Kristine 40 Paul 30 Samantha 20Explanation / Answer
Perfect price discrimination or first degree price discrimination occurs when the producers charges different price for every unit consumed . In this strategy the producer charges each consumer their reservation price . So they can capture the whole consumer surplus and transform it into revenue .
If the driver charges men one price then he must charge 50$ , which is the reservation price of Peter . Profit = (2*50)-(2*10) = 80 $ . We can see that when the price is 50$ only John and Peter will take the ride . And the profit is maximum in this case . Profit = revenue - cost .
In case of women , Price = 40$ . Only Mary and Kristine will avail the ride . Profit = (2*40)-(2*10) = 60 $ . Any other price like 60$ or 20$ will not maximize profit .
So total profit = 80+60 = 140$ .
In case of perfect price discrimination , profit = (70-10)+(60-10)+(50-10)+(40-10)+(30-10)+(20-10)= 210 $ ( all the consumer surplus is captured )