Question

PART D features an essay-type question and requires the student to provide a thorough discussion of the following specific issues asked.

2. Demonstrate that in order to achieve optimal third – degree price discrimination, marginal revenue for each consumer group must be equal to marginal cost;

Answer 1

Answer

Third degree price discrimination is a type of price discrimination for a consumer group of different race, sex, age group , etc .For example 10 % discount to early birds is an example of 3 rd degree price discrimination. Now what we call a perfect third degree price discrimination is where marginal revenue is equal to the marghinal cost .Now lets understand why it is so ?

Basically according to the economist , if we want to maximize our profit or any firm wanting to maximize its profit then in that case it should have to produce at a level where the marginal revenue is equal to the marginal cost .Now if as long the marginal revenue of a consumer group remian greater than the marginal cost , it will have to pay to produce more .And every unit that will be sold will be added more to the revenue of the cosnumer group than to the cost. Letts take an example of Pizza store with a price discrimination of 20 % to couples , now the MR is the price of one more pizza unit sold and it will be equal to the equal to the marginal cost that is additionally produced .Here we can see that third degree price discrimination is maximizing the profit .Hence , in order to achieve third degree price discrimination , the marginal revenue of consumer group is equal to the marginal cost .

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