Question

4. Assume that you are to decide whether a third degree discrimination situation is in society's interest. Assume that under the "no discrimination allowed" case, both groups of customers, group A and group B, can afford to buy positive amounts of the product at the same price. Under discrimination, both groups of customers can afford to purchase positive quantities of the product with group B paying a lower price than group A. Under discrimination the quantity bought by group B users increase and the quantity under group A users decreases compared to the no discrimination case. However, the total quantity bought by the two groups remains the same under discrimination and no discrimination. The legal permission to price discriminate would benefit the monopolist but the group A buyers would be harmed. [12 Points] a. Do you agree or disagree? Explain. Please type your explanation in word. b. Justify your answer with the aid of a fully labeled diagram.

Answer 1

a) Third degree price discrimination is beneficial for the society as the users are paying as per the group they belong to. For the monopolist, he would be benefitted as there would be more number of buyers who would buy at low price and thus the overall revenue of the monopolist increases. For instance, In the fight there would be business class and economy class passengers. Business class passengers would pay more with come additional facilities than the economy class passengers. As a result the revenue of railways would increase overall, as there would be more number of passengers travelling in economy class than business class. At the same time, business class passengers would be harmed as they end up paying more fare to the railways.

b)

Masnbot MC ogeanand MR

Market kuce Mc MR,

So as the monopolist charges high price for Market segment 1 its overall revenue and profit increases and charging low price for Market Segment 2. Thus the overall revenue and profit increases.