CFA Practice Question

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CFA Practice Question

Which of the following is true about price discrimination?

I. Price discrimination increases firm profits.
II. Price discrimination benefits some consumers.
III. The price-discriminating firm will charge a higher price to the group with more inelastic demand.
IV. Price discrimination harms some consumers.
Correct Answer: I, II, III and IV

Price discrimination increases firm profits, benefits the group that is charged the lower price, and harms the more inelastic group, which is charged a higher price.

User Contributed Comments 10

User Comment
AWR83 How come the inelastic group is harmed? Aren't they willing to pay for that higher price anyway?
mini yes it is harmed: it could get a lower price without price discrimination.
MattyBo Price discrimination harms some consumers because what would have been their consumer surplus now goes to the firm as economic profit.
MMattioli the more inelastic group is harmed b/c w/out price discrimination they would have paid a lower price
Beret In perfect price discrimination "all" consumer surplus is gone, so it does not benifit customers...
bhmcfa HELP PLEASE! How is the inelastic group harmed? Absent price discrimination the monopoly will not produce in the inelastic output range b/c MR, which is below the demand curve, will be negative in the inelasic range. If the monopoly price discriminates, its MR curve will now equal its demand curve and output will increase (to include the inelastic part of the demand curve). Hence the consumers in the inelastic part of the demand curve will be able to purchase the product because the firm is now able to sell it to them (price discriminate) at the lower price. Someone PLEASE EXPLAIN!
YOUCANDOIT I agree with Beret...each customer is charged the max that they are willing to pay under perfect price discrimination...text says consumers may think they are benefiting but in reality they are not b/c consumer surplus is redistributed to the producers.
sshetty2 Negative, if the firm CAN engage in price discrimination then they have price-setting power. This would mean that they could choose to produce less and charge a higher price. This would .. Suck for the people who can't afford that higher price.
sshetty2 Why is the inelastic part of the demand curve harmed? Because in order to maximize revenue, the profit-maximizing price-setting firm would not set price equal to what the consumer could realistically afford under price discrimination, they would sell at a price where mc = mr which would most likely be at a price lower than would be charged to consumers on the inelstastic part of the demand curve under price discrimination
Huricane74 @Beret & @YOUCANDOIT

With price discrimination, there is a higher quantity produced because the firm can continue to offer products and services at a lower price to consumers that have an elastic demand without losing the revenue the firm generates from selling products or services at a higher price to inelastic customers.

Remember, inelastic consumers have a greater need for a product or service, so they firm can continue to charge them a higher price.
Elastic consumers don't have as great of a need for a product or service, but can be induced into purchasing a product for the right price.

Watch the following video:
Micro 4.8 Price Discriminating Monopoly (First Degree)
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