Question

Suppose that the marginal cost of an additional ton of steel produced by a Japanese firm is the same whether the steel is set aside for domestic use or exported abroad. If the price elasticity of demand for steel is smaller abroad than it is in Japan, which of the following will be correct?

	A.	Foreign consumers are better off when the Japanese firm applies price discrimination.
	B.	Domestic consumers are better off when the Japanese firm applies price discrimination.
	C.	The firm is better off when the Japanese firm applies single price.
	D.	none of above.

Answer 1

B.	Domestic consumers are better off when the Japanese firm applies price discrimination.

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Demand is less elastic in foreign and more elastic in home. So it charges a higher price to foreign consumers and lower price to domestic consumers.

A company follows third-degree price discrimination by charging two different prices to a different set of consumers, it charges a higher price to consumers with inelastic demand and lower price to consumers with elastic demand.