Second Degree Price Discrimination Sample Homework
Question: Suppose that Philadelphia Electric has decided to use second-degree price discrimination (block pricing) in setting rates for household electrical use. Suppose further that the typical household in Philadelphia has a demand for electricity given by the following demand curve (note: this means that are making the simplifying assumption that all households in Philadelphia have the same demand for electricity): KWH = Q = 1600 – 100P
Where KWH denotes the number of Kilowatt hours demanded and P is the price per Kilowatt (measured in cents). The company plans on allowing the price per Kilowatt to change every 400 Kilowatts used – that is, the first 400 Kilowatts will be sold at one price, the next 400 at a different price, and so on. Finally, let’s assume that the marginal cost to the firm for providing electricity is 4 cents per Kilowatt.
a) What is second degree price discrimination?
b) Graph the typical consumer’s demand curve. Use your graph to figure out what price Philadelphia Electric should charge for the first 400 Kilowatts used. What should it charge for the next 400 Kilowatts? the next 400?
How many Kilowatts will a typical consumer use?