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social welfare implications of price discrimination

1) Price discrimination is often defended on the basis of equity (Charge less for the poor than the rich!). Is this the only rationale for price discrimination?

2) If a market price is determined by a dominant price leader, what happens to the price (gets higher or lower) if the number of the followers increase? (First review Figure 11.2 on page 504.)

(See attached diagram).

3) What is transfer pricing? Give an example.

4) Discuss the social welfare implications of price discrimination

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1) Price discrimination is often defended on the basis of equity (Charge less for the poor than the rich!). Is this the only rationale for price discrimination?

Ans:

Price discrimination is practiced by a supplier of goods or services when different prices are charged to different customers for the same product and when these price differentials do not accurately reflect differences in costs of serving the different customers .The key to price discrimination is to exploit the fact that different consumers have a different willingness & ability to pay for goods & services. Besides, the rationale for price discrimination is to increase the monopolist firm's level of profit relative to the situation where a single price is charged to all buyers. Thus, the aim of the price discrimination is to capture the consumer surplus & can be transformed into producer's surplus.

2) If a market price is determined by a dominant price leader, what happens to the price (gets higher or lower) if the number of the followers increase? (First review Figure 11.2 on page ...

Solution Summary

Social welfare implications of price discrimination are embedded.

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