Question

More inelastic the demand the lower is going to be the relative price, while more elastic the demand, higher is going to be the relative price charged by a discriminating monopolist. Explain using diagrams.

Answer 1

The statement is incorrect.The higher the elasticity,the lesser the relative price charged by a discriminating monopolist and vice versa.

From the figure it is clear that the price charged when demand is elastic is relatively lower.(P1<Pe)

Answer 2

To understand why the relative price charged by a discriminating monopolist is affected by the elasticity of demand, we need to consider the concept of price discrimination and how it relates to the monopolist's ability to segment the market.

Price discrimination occurs when a monopolist charges different prices for the same product to different groups of consumers, based on their willingness to pay. The monopolist does this to maximize profits by capturing consumer surplus and extracting higher prices from those with a more inelastic demand and lower prices from those with a more elastic demand.

Let's consider two scenarios: one with a more inelastic demand and another with a more elastic demand.

Scenario 1: More Inelastic Demand In this scenario, the demand for the product is relatively inelastic. This means that consumers are less responsive to changes in price. As a result, the monopolist can raise the price without losing many customers because demand is not highly sensitive to price changes.

In the diagram below, we have a linear demand curve (D) that represents the more inelastic demand. The monopolist sets the profit-maximizing price and quantity at point A, where marginal revenue (MR) equals marginal cost (MC). The price (P1) charged is higher, and the quantity (Q1) sold is lower compared to a perfectly competitive market.

cssCopy code            ^
            |    P      / 
    r     /    
    i    /     
    c   /  
    e  /  
      /   
      /______D             Q

Scenario 2: More Elastic Demand In this scenario, the demand for the product is relatively elastic. This means that consumers are highly responsive to changes in price, and small price increases can lead to significant decreases in quantity demanded.

In the diagram below, we have a flatter demand curve (D) that represents the more elastic demand. The monopolist sets the profit-maximizing price and quantity at point B. The price (P2) charged is lower, and the quantity (Q2) sold is higher compared to the scenario with more inelastic demand.

cssCopy code            ^
            |    P      / 
    r     /    
    i    /     
    c   /  
    e  /  
      /   
      /______D             Q

In both scenarios, the monopolist charges a higher price to the group with the more inelastic demand and a lower price to the group with the more elastic demand. This pricing strategy allows the monopolist to capture more consumer surplus from the group with a less elastic demand, as they are willing to pay higher prices. At the same time, the monopolist can attract more customers from the group with a more elastic demand by offering a lower price.

In summary, a discriminating monopolist will charge a lower relative price to the group with a more elastic demand and a higher relative price to the group with a more inelastic demand. This pricing strategy helps the monopolist maximize profits by tailoring prices to different segments of the market based on their responsiveness to price changes.