Suppose a restaurant is trying to determine how much to charge for a bowl of chili, and decides to run an experiment to see how much its customers are willing to pay by allowing them to set their own price for this menu item
a. Is charging a customer the price he or she is willing to pay for the bowl of chili an example of price discrimination? Briefly explain.
b. What is it called when a firm knows every consumer's willingness to pay, and can charge every consumer a different price? What happens to consumer surplus in this situation?
a. This is an example of price discrimination, since it references charging different prices to different customers for the same product, and the price differences are not due to differences in costs. Determining different customers' willingness to pay is one of the requirements for successful price discrimination, and this is accomplished by asking the customers how much they want to pay for the chili.
b. When a firm knows every consumer's willingness to pay, and can charge every consumer a different price, this is known as perfect price discrimination, or first-degree price discrimination. With perfect price discrimination, there is no consumer surplus.
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