Question

1. Explain how each of the following is a form of price discrimination.?

a. a student discount at the movie theatre

b. long-distance telephone service that costs 15 cents per minute for the first 10 minutes and 5 cents per minute after 10 minutes

c. a senior citizens’ breakfast discount at a local restaurant.

d. coupon discounts on laundry detergent

2.Evaluate the following statement regarding monopoly behaviour: “Since a monopoly firm is a price maker, it can charge whatever price it wants for whatever quantity it wants to sell.”

Answer 1

Ans) 1) Price discrimination is the practice of charging different price for same product. This enables the seller to increase the revenue by charging according to the willingness to pay or the elasticity of demand.

Here, student discount is price discrimination because the willingness to pay of a student is less (or demand elasticity is more) and in order to attract them, seller offers discount. This enables the seller to increase the revenue by capturing larger market share.

It is again price discrimination because for first few minutes, the willingness to pay is more (demand is less elastic) of a consumer but after a while, the willingness to pay of a consumer decreases. And in order to earn more revenue, seller lowers the price according to the willingness to pay of a consumer.

Senior citizens have more elastic demand for breakfast at a restaurant. And therefore, to attract them, seller offers lower price.

Collection of coupons show the lower willingness to pay of a consumer. And this acts a kind of signal for the seller that this buyer has lower willingness to pay and hence seller decreases the price i.e offers discount to capture that market share.

2) Monopoly is when there is a single seller selling unique product. Monopoly faces downward sloping demand curve. However, monopoly can charge whatever price it wants but only when it restricts the quantity.

In order to sell more quantity, monopoly will have to lower the price.