Question

1) Who benefits from price discrimination? In order for price discrimination to work producers must be able to do what?

2) Describe your plan to reduce asymetric information in buying a house, car, insurance policy or choosing a college to apply to.

3) What are the benefits and shortcomings of Monopoly?

Need help with these 3 questions.

Answer 1

1) Price discrimination happens when a producer charges different price for the same good or service he renders. There are 3 degrees of price discrimination. First degree, second degree and third degree.

The producer benefits from price discrimination as he gets to charge different price for the same commodity and sometimes captures the whole consumer surplus leaving him better off.

In order for price discrimination to work following assumption are necessary

1. If the producer has some degree of monopoly power

2. Markets are kept separate

3. There must be no connection between two markets where a consumer can get the same commodity for a cheaper rate.

2) asymmetric information is a situation when one person has more information than the other.

When buying an used car, if there is asymmetric information in the market then the seller would have more information about the condition of the car than me.

The best solution to the problem of asymmetric information is to increase the amount of information available to the consumers. It is impossible to gather all the information but if enough information is provided a person can take an informed decision about the quality. A website that provides track record of the dealer would help gain valuable information. It could provide with a list of local mechanics by whom we could get the car checked out.

Asking the seller to give warranty on the car would also help me because if the car turns out to be bad then we would be covered under the warranty and our investment would not be redundant.

3) The benefits of monopoly are as follows

- monopoly avoids duplication hence avoids wastage of resources

-monopoly enjoys economies of scale and hence may have reduced price, the benefit of which can be passed on to consumers

-monopoly may use price discrimination which may benefit the poor by chaginch them less amount

Shortcomings are as follows

- lack of competition may lead to low quality goods

- poor service quality

- consumer can be charged high prices