Question

3) Price Discrimination

Graphically show and explain, given a constant marginal cost, how the profit maximizing price and quantity are determined by a

a) Single priced monopolist

b) Perfect (first degree) price discriminating monopolist

c) (Third degree) price monopolist who can separate the buyers into two groups and charge them each a single but different price.

Compare or rank (from highest to lowest) the resulting price and quantity and producer surplus in each of these three monopolistic situations, explaining why you rank them in the order given.

Answer 1

b) The monopolists charges according to the maximum willingness to pay of the consumers and in total produces till the point where price equals marginal cost. He is able to extract the entire consumer surplus as profit and earns the greatest possible profit.

c) In the presence of different elasticities in different markets and the precence of transaction cost that creates no possibility of reselling of the good, the monopolist is able to charge diffrent prices in different markets according to the relative elasticity. He charges a lower price in the elastic market and a higher price in the less elastic market, for maximization of profit. The equilibrium for each market it at the point where MR equals MC and the price is charged accordng to the demand curve.

In terms of profit, the monopolist can be ranked as follows (from the highest level of profits acheivable situation) : first degree price discrimination, third degree price discrimnation and single priced monopoly.