Wednesday, November 12, 2014

Teaching Economics through Pictures - Food Trucks and Price Discrimination

Thanks to Austin Boyle (he's at @austinboyleecon) for posting this on twitter ...

This is a picture of a menu from a food truck.  The key thing to note is how the prices aren't printed on the menu?

The most reasonable explanation for why they're not posted is that firms price discriminate.  When the food trucks go to different locations, some consumers may have higher incomes overall while others have lower incomes.  This will translate into larger or smaller willingness to pay for food products.  By not printing the prices on the menu, food trucks can price discriminate.  What might cost $8 in one part of town will cost $9 or $7 in others.  The firm will change prices in order to maximize profits.

This is a classic example of price discrimination.  The cost to the firm is the same, but different prices are charged to different people based on their willingness to pay.

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