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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.
Answer
To complete the diagram, we need to show the profit-maximizing outputs for both students and non-students. For students, we denote the demand curve as AR_s and MR_s. Given the 10% discount, the AR_s curve will shift downwards, and the MR_s will reflect that change. The intersection of MR_s with the marginal cost (MC) indicates the quantity produced for students.
Subsequently, for the non-students, we denote the curves as AR_n and MR_n. Since they do not benefit from the discount, the AR_n and MR_n curves will show higher prices relative to the students. The MC curve remains constant, allowing us to identify the profit-maximizing quantity for the non-students as well.
Step 2
Identify the Price and Profit for Students.
Answer
In the students' market, the intersection of MR_s and MC gives us the profit-maximizing quantity, which we denote as Q_s. The price at which this quantity is sold is P_s, reflecting the effects of the discount. The profit for students can be calculated as the area of the rectangle formed by (P_s - AC) × Q_s.
Step 3
Identify the Price and Profit for Non-Students.
Answer
For the non-students, the MR_n intersects the MC at the profit-maximizing quantity denoted as Q_n. The corresponding price is represented as P_n, which will be higher due to the absence of discounts. The profit for this group can similarly be calculated as the area (P_n - AC) × Q_n.
Step 4
Which one of the following is necessary for a firm to be able to practice 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 for different customers or groups, which necessitates an element of market power. The other options do not directly relate to the fundamental principles of price discrimination.