Charging a single price clearly will not do the trick. However, the firm might charge different prices to different customers, according to where the customers are along the demand curve. or example, some customers in the upper end of region A would be charged the higher price P1, some in region B would be charged the lower price P2, and some in between would be charged P*. This is the basis of price discrimination.
Ideally, a firm would like to charge a different price to each of its customers. If it could, it would charge each customer the maximum price that the customer is willing to pay for each unit bought. We call this maximum price the customer’s reservation price. The practice of charging each customer his or her reservation price is called perfect first-degree price discrimination.
In some markets, as each consumer purchases many units of a good over any given period, his reservation price declines with the number of units purchased. Examples include water, heating fuel, and electricity. Consumers may each pur- chase a few hundred kilowatt-hours of electricity a month, but their willingness to pay declines with increasing consumption. The first 100 kilowatt-hours may be worth a lot to the consumer—operating a refrigerator and providing for minimal lighting. Conservation becomes easier with the additional units and may be worth- while if the price is high. In this situation, a firm can discriminate according to the quantity consumed. This is called second-degree price discrimination, and it works by charging different prices for different quantities of the same good or service.
Quantity discounts are an example of second-degree price discrimination. A single light bulb might be priced at $5, while a box containing four of the same bulb might be priced at $14, making the average price per bulb $3.50. Similarly, the price per ounce for breakfast cereal is likely to be smaller for the 24-ounce box than for the 16-ounce box.
Third-degree price discrimination divides consumers into two or more groups with separate demand curves for each group. It is the most prevalent form of price discrimination, and examples abound: regular versus “special” airline fares; premium versus nonpremium brands of liquor, canned food or frozen vegetables; discounts to students and senior citizens; and so on.
Monopsony refers to a market in which there is a single buyer.
Profit = 10.67 * 11.5 - 5 - 3 * 11.5 = 83.205