Consider the models of pricing with market power (i.e., price discrimination) co
ID: 1123434 • Letter: C
Question
Consider the models of pricing with market power (i.e., price discrimination) covered in class. Which of the following statements is true? A. The model of 1st degree price discrimination implies zero consumer surplus and zero deadweight loss. B. A monopolist implements 3rd degree price discrimination across two markets, A and B. If the elasticity of demand is 2.5 in market A and 1.75 in market B, then the optimal price in market A should be lower than that optimal price in market B. C. Some of the pricing strategies of 2nd degree price discrimination are set up in a way that gives consumers the incentive to self-select into the option designed for them. D. All of the above. E. Only (a) and (c)
Explanation / Answer
The correct option is D i.e all of the above is true.
A) option A is true because in 1st degree price discrimination monopolist charges price equal to marginal cost. Means monopolist charge price equal to consumer willingness to pay. So consumer surplus is 0 nd dead weight loss is also 0.
2) there is negatiive relationship between price elasticity of demand and price. Elasticity of demand is higher in market 1 than in market 2 so monopolist charge price lower in market 1 than in market 2.so, option B is also true.
3) in 2nd degree price discrimination different prices are charged for different units sold to the same consumer (non- linear pricing). But the same price schedule set for different consumers and consumer self select the option designed for them. So option C is also true.