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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 (a)
Answer
To complete the diagram for third-degree price discrimination, we need to plot the average revenue (AR) and marginal revenue (MR) curves for both students and non-students.
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For Students (a):
- The price for students (P_a) will be set above the average cost (AC) to generate profit. Draw a downward-sloping demand curve for students labeled as AR_a, and the MR_a below it.
- Mark the profit-maximizing quantity where MR_a intersects with MC. The price at this quantity is P_a, and the corresponding profit can be represented as the area between the AR_a curve and the AC at this quantity.
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For Non-Students (b):
- For non-students, draw a similar downward-sloping demand curve labeled as AR_b and the corresponding MR_b curve below.
- Determine the profit-maximizing price (P_b) and quantity by finding where MR_b intersects MC. Mark the profit area for non-students, which is the difference between AR_b and AC at the given quantity.
Step 2
Which one of the following is necessary for a firm to be able to practise price discrimination? (b)
Answer
The necessary condition for a firm to practice price discrimination is:
A. It has some degree of market power.
This is because a firm must be able to set prices above marginal cost in order to charge different prices to different groups of consumers. The other options do not accurately describe the necessity for price discrimination:
- B. Storing the product is not related to price discrimination.
- C. Even if products have different features, if they are homogenous in the market, price discrimination is not applicable.
- D. The costs of supplying some customers being higher does not impact the ability to set different prices across market segments.