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Define third-degree price discrimination

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A monopolist sells its product to two types of customers, business customers and other customers. The monopolist's total cost is given by TC = 20 + 2Q, where Q denotes total output, so the marginal cost is equal to 2. Let P denote price. The demand of business customers is given by QB = 14 - P. The demand of other customers is given by QO = 5 - 0.5P. Note that you may need to allow price to differ between markets and possibly for different units purchased.

(i) Define third-degree price discrimination. Assuming that such discrimination between the two groups is possible, calculate the price that the monopolist will set for business customers, the price it will set for other customers and the firm's total profit.

(ii) Define first-degree price discrimination. Assuming that such discrimination is possible, how much will the monopolist sell to each group? Calculate the firm's total profit.

(iii) Which gives higher profit, the pricing scheme in part (i) or that in part (ii)? Is this a general result or does it depend on the particular numbers used in this example? Explain.

(iv) The government now requires the firm to charge the same price to all its customers irrespective of the group they belong to. Discuss the effect of this on the consumer surplus of business customers, the consumer surplus of other customersand the firm's total profit as compared to the situation in part (i).

Reference no: EM132504894

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