Question

True or false - show working.

Consider a monopoly provider of water tanks. The monopolist could practice third degree price discrimination by setting a price of $5000 for a 5000 litre water tank to residents in rural areas, but charge only $4000 for the same 5000 litre water tank to urban residents because the elasticity of demand is more inelastic in urban areas. 10 marks.

Use graphs to explain.

Answer 1

The statement is false.

Reason

The monopoly is charging lesser price to the consumers who are more price elastic, since if they are charged more, they will consume much lesser than the inelastic counterpart.

As depicted in the graph, high price elastic segments are charged lower to maximize profit, since urban residents are charged lower, they must be more price elastic than rural counterpart.