Question

2. (i) Explain why a computer store offering significant student discounts may require student buyers to sign an agreement not to purchase another computer from the store for a period of six months.

(ii) What is meant by the “welfare loss” of monopoly? Why does no welfare loss occur if a monopolist successfully practises perfect price discrimination?

Answer 1

2i) It is done so that students shall not re-sell the discounted computers in the market. In order to price discriminate, it is important that goods cannot be re-sold across the two markets, else students will buy cheap and sell at lower than the shop's prices to other prospective buyers.

ii) Welfare loss is due to a monopoly charging higer prices and producing lower output than the perfect compeition market. This results by reduction in consumer surplus as the price is higher and the quantity lower, a part of this reduction is transferred to proucer surplus, however, there is a proportion that is not captured by the monopoly. A monopoly practicing perfect price discrimination captures the entire consumer surplus and since there is no portion left as deadweight loss, there is no welfare loss.