For each of the following examples, explain how and why a monopoly would try to

Question

For each of the following examples, explain how and why a monopoly would try to price discriminate.

1) Air transport for businesspeople and tourists.

2) Serving food on weekdays to businesspeople and retired people. (Hint: Which group has more flexibility during a weekday to adjust to a price change and, hence, a higher price elasticity of demand?

3) A theater that shows the same movie to large families and to individuals and couples. (Hint: For which set of people will the overall expense of a movie be a larger part of their budget, so that demand is more elastic?)

Explanation / Answer

an airline monopoly. Airlines frequently sell various seats at various prices based on demand AND ELASTICITY OF DEMAND. FOR BUISNESS PEOPLE DEMAND IS INELASTIC.SO MONOPOLIST CHARGES HIGH PRICEFROM THEM.

FOR TOURISTS DEMAND IS COPARATIVELY ELATIC SO MONOPOLIST CHARGES LESS PRICE FROM THEM AS COMPARED TO BUSINESS PEOPLE.

2

the supplier(s) of a market where this type of discrimination is exhibited are capable of differentiating between consumer classes. Examples of this differentiation are student or senior discounts. For example, a student or a senior consumer will have a different willingness to pay than an average consumer, where the reservation price is presumably lower because of budget constraints. Thus, the supplier sets a lower price for that consumer because the student or senior has a more elasticPrice elasticity of demandThe supplier is once again capable of capturing more market surplus than would be possible without price discrimination

Retired peoplehas more flexibility during a weekday to adjust to a price change and, hence, a higher price elasticity of demand.

3

For lthe large families the overall expense of a movie is a larger part of their budget., so the demand is more elastic for them .and monopolist can charge less from this group to maximise his profits.

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