Why do some firms practice price discrimination? Relate your answer to the common practice of public colleges charging lower tuition to in-state students and higher tuition to out-of-state students

Question

What will be an ideal response?

Answer 1

Price discrimination helps businesses capture more consumer surplus and hence increase their economic profit. Basically the firm charges more to people who are willing to pay more. For a public college, out-of-state students will likely have a higher willingness to pay for attending that college because, by leaving their home state, they are demonstrating that they truly want to attend the college. If the college charged in-state residents the same tuition as out-of-state residents, the college would miss the chance to maximize revenue from each group. Charging in-state residents the same high price as out-of-state residents would lead to a massive drop in quantity demanded and thus lower total revenue. By separating their customers based on differing demand conditions, the college earns more total revenue.