Question

A monopolist is using third-degree price discrimination. Which of the following statements are true?

        I.            If a monopolist can use either the first-degree price discrimination or the third-degree price discrimination, then using third-degree price discrimination results in strictly higher profit than using first-degree price discrimination.
      II.            A monopolist using third-degree price discrimination needs to know the willingness to pay of different groups of consumers
    III.            Student discounts are an example of third-degree price discrimination

Group of answer choices

Which of the statements about the short-run are true?

I. Average fixed cost is always declining
II. Because of diminishing marginal product, average variable cost is eventually upward-sloping
III. When marginal cost is below the average total cost, the average total cost is falling as quantity increases

Group of answer choices

only I and II are true

None of the other answers is correct

I, II, and III are true

only I and III are true

only II and III are true

Consider a monopolist facing a demand curve of P = 100 – 20q, where P is market price and q is quantity. The monopolist has a constant marginal cost curve of $50 per unit. What is the monopolist’s marginal revenue curve (MR)?

Group of answer choices

MR = 100 – 40q

MR = 100 – 20q

None of the other answers is correct

MR =200 – 20q

MR = 50

Answer 1

Solution to question 1: II & III are True

Concept : Price discrimination may be related to the consumer surplus enjoyed by th consumers. Prof. Pigou classified three degree of price discrimination. Under the first degree price discrimination, the monopolist separates the market into each individual consumer and charges them the price they are willing and able to pay and thereby extract the entire consumer surplus. Doctors, lawyers, consultants etc., charging different fees, prices decided under ‘bid and offer’ system, auctions, and through negotiations are examples of first degree price discrimination.

Under the third degree price discrimination, price varies by attributes such as location or by customer segment. Here the monopolist will divide the consumers into separate sub-markets and charge different prices in different sub-markets. Examples: Dumping, charging different prices for domestic and commercial uses, lower prices in railways for senior citizens, etc.

Explanation: I) False, First-degree price discrimination results in strictly higher profit than using third-degree price discrimination because first-degree price discrimination extract the entire consumer surplus.

II) Yes, A monopolist using third-degree price discrimination needs to know the willingness to pay of different groups of consumers for charging different price from different groups of consumers.

III) Yes, Student discounts are an example of third-degree price discrimination. The monopolist divided the consumers into separate sub-markets and charging different prices in different sub-markets.

Solution to question 2: only I, II and III are true

Explanation : I) Average fixed cost is always decling, but it will not touch x axis or it will not be Zero.

II) Average variable cost is found out by dividing the total variable cost by the number of units of output produced. Thus, average variable cost is the variable cost per unit of output. Average variable cost normally falls as output increases from zero to normal capacity output due to occurrence of increasing returns to variable factors. But beyond the normal capacity output, average variable cost will rise steeply because of the operation of diminishing returns. If we draw an average variable cost curve, it will first fall, then reach a minimum and then rise.

III) When average total cost falls as a result of an increase in output, marginal cost is less than average total cost.

Solution to question 3: None of the other answers is correct

If a monopolist sell one quantity the revenue is P=80, MR=80; two quantities P=60, Total revenue=120, MR=40;

We identified MR doesn't suit for given MR curve equation.