Question

1.Say a firm is practicing first degree (or perfect) price discrimination. What price will the firm try to charge each of its customers?

a.A third firm can either produce a component it needs by itself, or purchase that component on an outside competitive market. What will be the transfer price of that component?

Answer 1

1)

First degree price discrimination is called the perfect price discrimination. Here, Firm deals with each customers separately. Customers are left with zero Consumer surplus. Thus, firm tries to charge the maximum price customer wants to pay.

Price charged = Maximum price a customer wants to pay.

a)

In competitive market output is determined where P = MC.

In other words firm tends to outproduce non competitive market.

Hence, when firm buys from outside the competitive market, it tends to make higher payment. or non-competitive market will charge higher price, so the transfer price would be higher ones.