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River Island is a clothing retailer - Edexcel - A-Level Economics A - Question 3 - 2021 - Paper 1
Question 3
River Island is a clothing retailer. Students are offered a River Island student discount code to benefit from a 10% price reduction as an attempt by the firm to inc... show full transcript
Worked Solution & Example Answer:River Island is a clothing retailer - Edexcel - A-Level Economics A - Question 3 - 2021 - Paper 1
Step 1
Complete the third-degree price discrimination diagram below.
Answer
To complete the third-degree price discrimination diagram, we analyze both the students' and non-students' markets.
- Identify Price and Quantity for Students: Draw the marginal revenue (MR) and average revenue (AR) curves for students.
- The demand curve shifts to a higher price due to the price reduction (10%).
- The equilibrium price (P_a) will be identified at the intersection of MR and the marginal cost curve (MC), leading to a higher profit area.
- Identify Price and Quantity for Non-Students: For non-students, draw the respective MR and AR curves based on the regular market price.
- Since there is no discount for non-students, we identify the profit maximizing price (P_b) similarly at the intersection of MR for non-students and MC.
The diagram should depict the price levels and quantities sold in each market segment, highlighting the price elasticity and different revenue based on the price discrimination strategy.
- Draw Impact on Profit: Indicate the profit areas by shading the region between the price level and average cost (AC) for both students and non-students. This demonstrates the profit margin achieved through discrimination.
Step 2
Which one of the following is necessary for a firm to be able to practise price discrimination?
Answer
The only correct answer is A: It has some degree of market power.
Price discrimination requires the ability to set different prices in different markets; thus, a firm must have some control over its pricing strategies, which is defined as market power.
- Explanation of Incorrect Options:
- B is incorrect because the price elasticity of supply does not influence price discrimination.
- C is incorrect as third-degree price discrimination involves selling the same product under different conditions, not different features.
- D is also incorrect since price discrimination is primarily a pricing strategy, not directly related to production costs.