The price elasticity of demand for restaurant meals is 1.5 for type A consumers and 0.9 for type B consumers. If a resturabt decides to price discriminate, which group will be charged a higher price? Explain your answer
The group that will be charged a higher price is Type A consumers.
This can be explained by the concept of price elasticity of demand. Price elasticity of demand measures how sensitive the quantity demanded is to a change in price. A higher price elasticity means that demand is more sensitive to price changes.
In this case, Type A consumers have a price elasticity of demand of 1.5, which is higher than the price elasticity of Type B consumers (0.9). This means that Type A consumers are more responsive to price changes than Type B consumers.
When a restaurant engages in price discrimination, it aims to extract higher prices from consumers who are less sensitive to price changes and charge lower prices to consumers who are more price-sensitive. This strategy allows the restaurant to capture more consumer surplus and maximize its profits.
Therefore, since Type A consumers are more responsive to price changes (have a higher price elasticity), the restaurant would charge them a higher price compared to Type B consumers, who are less sensitive to price changes (have a lower price elasticity).
To determine which group will be charged a higher price when a restaurant decides to price discriminate, we need to compare the price elasticities of demand for both consumer types.
The price elasticity of demand measures the responsiveness of quantity demanded to a change in price. In general, a higher absolute value of price elasticity indicates a more elastic demand, meaning that consumers are more responsive to price changes. Conversely, a lower absolute value of price elasticity indicates a more inelastic demand, meaning that consumers are less responsive to price changes.
Given that the price elasticity of demand for type A consumers is 1.5, and the price elasticity of demand for type B consumers is 0.9, it means that type A consumers are more price sensitive and have a more elastic demand compared to type B consumers.
Therefore, when a restaurant price discriminates, it is likely to charge type B consumers a higher price. This is because type B consumers are more willing to pay a higher price as they have a less elastic demand. Price discrimination allows the restaurant to maximize its profits by charging higher prices to consumers who are less responsive to price changes.
To determine which group will be charged a higher price when a restaurant decides to price discriminate, we need to consider their respective price elasticities of demand.
Price elasticity of demand measures the responsiveness of quantity demanded to changes in price. A higher elasticity indicates that consumers are more responsive to price changes, meaning that a small increase in price will lead to a relatively larger decrease in quantity demanded.
In this case, we have a price elasticity of demand of 1.5 for type A consumers and 0.9 for type B consumers. Since a higher elasticity indicates greater responsiveness to price changes, we can conclude that type A consumers are more price-sensitive than type B consumers.
Therefore, to maximize profits, the restaurant should charge a higher price to type A consumers who have a higher price elasticity of demand. These consumers will be more likely to decrease their quantity demanded significantly in response to a price increase. Charging them a higher price ensures that the restaurant can capture more of their willingness to pay and generate higher revenue.
On the other hand, type B consumers, with a lower price elasticity of demand, are less sensitive to price changes. Lower elasticity implies that they are more willing to maintain their quantity demanded, even when faced with a price increase. Thus, the restaurant can charge them a relatively lower price and still generate a sufficient level of demand.
In summary, the restaurant will charge a higher price to type A consumers because they have a higher price elasticity of demand and are more price-sensitive. Type B consumers, with a lower price elasticity, will be charged a relatively lower price.