Principles of Microeconomics / Unit 8 MIC 0727 worked example, 60 to 90 seconds
Which Group Pays More
The idea
Given two groups of buyers with different price elasticities, the discriminating firm charges the group with the less elastic demand the higher price and the group with the more elastic demand the lower price. The logic is the total revenue test run on each group separately: raising the price on the inelastic group raises its revenue, and cutting the price for the elastic group raises its revenue, and both changes raise profit. To answer, classify each group's elasticity, assign prices in that order, and check both conditions for discrimination hold.
In practice
Worked example: a theater's evening audience is business travelers with few alternatives, elasticity about half, and its matinee audience is students with many, elasticity about two. It should charge the evening audience more and the matinee audience less: eighteen dollars and nine dollars, say, rather than a single price of fourteen. Raising the evening price cut a few sales and raised revenue; cutting the matinee price drew many students and raised revenue too, with marginal cost per seat near zero.
Where people slip
The assignment runs on elasticity, not on ability to pay as such; the rich pay more only where their demand is less elastic. And the scheme collapses if students can resell evening tickets or if the groups cannot be told apart, which is why identification and non-transferable tickets matter.
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