Question

PART D features an essay-type question and requires the student to provide a thorough discussion of the following specific issues asked.

1. Define and explain Third – Degree Price Discrimination;

2. Demonstrate that in order to achieve optimal third – degree price discrimination, marginal revenue for each consumer group must be equal to marginal cost;

Answer 1

Price discrimination of third-degree defines the seller's division of customers into exogenous groups according to the specific characteristics and then offer a content marginal price to each customer. These characters should separate consumers with different price sensitivities. the example of this kind of discrimination is popular as student discounts, elderly discounts, etc. In this case, the consumer retains the maximum possible consumer surplus from a price discriminating monopolist. here the consumer surplus is the market measure of the excess of consumer's willingness to pay for a good over its market price.

sp now we can present the price discriminating model with an assumption of the seller has divided the market into to two-part. each has its own demand curve with different elasticity D1 and D2. so accordingly MR1 and MR2 marginal revenue curves and also the aggregate MR. marginal cost MC.

So total output production decided by the interaction of MR and MC at the point E total output OX and price P. SO in both market MR1=M<R2=MC. so both the market will work on till they didn't achieve the above condition. The perpendicular line has been drawn according to MR1 P1 and MR2 P2 . and the discriminating price will produce OX1 for P1 and OX2 for P2. so from this diagram we can say that the monopolist will gain because of the sum of the areaOP1FX1 and OP2 EX2., which is more than the area OXAP.

If there is no negotiation from consumer side then the monopolist will charge the maximum price that the consumer is willing to pay.