DSE 2013 Question 37: Monopoly and price discrimination
A basic good (a car) is produced by a monopolist at no cost; a complementary good (car audio) is produced competitively at cost c per unit. Let p be the price of the basic good. Each consumer chooses among: (i) nothing, utility 0; (ii) the basic good alone, utility v−p; (iii) the bundle of basic plus complementary good, utility w−p−c; with w>v>0. There are two types: Middle Class with valuations (v1,w1) and Rich with (v2,w2), where v2>v1 and w2−v2>c>w1−v1.
Suppose the monopolist can distinguish between the two types of consumers. What prices would she charge?
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A basic good (a car) is produced by a monopolist at no cost; a complementary good (car audio) is produced competitively at cost c per unit. Let p be the price of the basic good. Each consumer chooses among: (i) nothing, utility 0; (ii) the basic good alone, utility v-p; (iii) the bundle of basic plus complementary good, utility w-p-c; with w>v>0. There are two types: Middle Class with valuations (v₁,w₁) and Rich with (v₂,w₂), where v₂>v₁ and w₂-v₂>c>w₁-v₁. Suppose the monopolist can distinguish between the two types of consumers. What prices would she charge? (A) v₂ from Rich, and v₁ from Middle Class (B) w₂-c from Rich, and w₁-c from Middle Class (C) w₁-c from Rich as well as Middle Class (D) w₂-c from Rich, and v₁ from Middle Class
Also written as: A basic good (a car) is produced by a monopolist at no cost; a complementary good (car audio) is produced competitively at cost c per unit. Let p be the price of the basic good. Each consumer chooses among: (i) nothing, utility 0; (ii) the basic good alone, utility v-p; (iii) the bundle of basic plus complementary good, utility w-p-c; with w>v>0. There are two types: Middle Class with valuations (v_1,w_1) and Rich with (v_2,w_2), where v_2>v_1 and w_2-v_2>c>w_1-v_1. Suppose the monopolist can distinguish between the two types of consumers. What prices would she charge?
Monopoly and price discrimination has come up 128 times in 7 exams since 2004.
What this question tests
This question is on First- and second-degree price discrimination and two-part tariffs, part of Monopoly and price discrimination in Microeconomics.
Charging different prices by consumer or by quantity, up to perfect discrimination and two-part tariffs.
TestStop has 19 past-paper questions on this subtopic.
