Learning Journal Unit 5 – Chapter 11
Respond to the following question with at least three well composed paragraphs: Restaurants typically charge much higher prices for dinner than for lunch, despite the fact that the cost of serving these meals is about the same. Why do you think this is the case? (Hint: Think about the primary consumers of these meals and their respective elasticities.)
Restaurants follow a monopolistic competition. In fact, they present differentiated products that differ by their size, design, taste, and price. In a monopolistic competition, barriers to entry and exit are relatively low. Making profit is possible in the short run. Information is available for the seeker. Companies in this type of competition use advertisement
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There are 3 types of price discrimination:
- First degree, also known as perfect price discrimination, is when a different price is charged for every unit consumed. This type of price discrimination is usually rare. (Economics online, 2016).
- Second degree occurs when a firm charges a different price for different quantities. For example, when a firm buys a large quantity of goods, it gets a higher discount and therefore a lower price.
- And third degree happens when a firm charges a different price to different consumer groups. This type is very common among restaurants. For this type to be successfully applied there must be a difference in time, for example peak and off peak time; difference in physical distance and nature of use; different age groups; and different price elasticities of demand.
Photo credit: (Economics online Ltd., 2016).
Depending on the elasticity of demand, the graphs above show the different curves and profits. For restaurants, the elasticity of demand is relatively elastic and therefore the graph in the middle show how restaurant might opt to change their prices to make more