Question

 

A monopolist practicing third degree price discrimination has two types of consumers. Type 1 have an elasticity of demand of 2, and Type 2 have an elasticity of demand equal to 5. Which of the following is true?

 

Answer 1

 Yes, a monopolist practicing third-degree price discrimination will indeed have different types of consumers.

 Third-degree price discrimination happens when demographic or other traits segregate customers.

 For example, some econometric software is licensed this way: A student version can handle only small datasets and is sold for a low price; a professional version can handle massive datasets and is sold at a much higher price because corporations need to compute the estimates for their business and are therefore willing to pay more for a license.

 Another example is that airlines know that passengers who want to fly somewhere and come back the same day are most likely business people; therefore, one-day roundtrip tickets are generally more expensive than tickets with a return flight at a later date or over a weekend

 This is a way that sellers can sometimes extract consumer surplus through creative pricing schemes. It's a common practice among big-box retailers, sports clubs, and other users of what is called two-part tariff pricing. Therefore it is possible that some consumers will have higher elasticity and some will have lower, and they will be paying different prices.