Question

ANALYSIS QUESTION: /10

Does the firm make more profits if it engages in 1st or 2nd-degree price discrimination? Explain with numerical graphical examples. The more detailed the explanation you provide, the more credits you’ll get.©

Answer 1

The Monopoly firm tends to use the strategy of price discrimination to increase its profit level.

The price discrimination refers to the pricing system of monopoly where it charges different prices from the different consumers for the identical product.

The first degree price discrimination is considered as the most effective way to increase the profit of the firm. Under the first degree price discrimination, the producer knows the willingness to pay of each consumers. thus the whole consumer surplus becomes the producer surplus. the profit of the monopoly is maximum under the first degree price discrimination.

While in case of second degree price discrimination, the discount is offered to consumer who buys the goods in larger quantity, thus producer fails to take over the entire consumer surplus , thus profits level is low relative to first degree price discrimination.

Following is the diagram: