Question

PART D features an essay-type question and requires the student to provide a thorough discussion of the following specific issues asked.

1. Define and explain Third – Degree Price Discrimination;

2. Demonstrate that in order to achieve optimal third – degree price discrimination, marginal revenue for each consumer group must be equal to marginal cost;

3. By using the condition in subpart 2, demonstrate how the firm carrying out the third – degree price discrimination, should change its prices and total output if the demand curve for one consumer group shifts outward, causing marginal revenue for that group to increase.

Answer 1

FIRST QUESTION-

THIRD DEGREE PRICE DISCRIMINATION-

third price discrimination is a concept in the monopoly market structure,where a firm charges different price for same goods in two different markets.

following point should be followed with the concept of price discrimination-

• transfer of goods should not be possible by consumers from market A to market B and vice versa.
• there should be different elasticity in the economy concerned with the price demanded

SECOND QUESTION

the MR should be same in the two different market.

following condition must be fulfilled-

MR(a)=MR(b)=MR(a+b)=MC

• from the above diagram we can conclude that total quantity is determined where MC of the firm cuts MR from below, and the quantity is determined and the MR is same for the both market.
• the MC is same for market A and B therefore they can't charge price below to there MC in either market.

THIRD QUESTION

1. in market A the demand curve (AR=D) is inelastic and therefore higher price should be charged and the excess quantity should be transferred in market B,in this market increase in price won't lead to change higher level of commodity therefore supply would be OA and price would be OP in A market.
2. in market B demand curve (AR1-D1) is elastic and therefore more quantity should be sold at a lower price in the economy and the sale and profit of the firm can be maximized
3. in this way changing the quantity from one market to other market maximized the sale and profit.