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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, we identify the two markets: Students and Non-students.
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For the Students market (a):
- Draw a downward-sloping demand curve (AR) intersecting the price axis at a higher price (P_s) and the quantity axis at a lower quantity (Q_s).
- Introduce a marginal revenue curve (MR_s) lying below the demand curve that reflects the price reduction from the discount.
- Identify the profit-maximization point where MR_s equals marginal cost (MC), where the new price after the 10% discount would be indicated as P'_s.
- The area calculated as the difference between the price P'_s and average cost (AC) at quantity Q_s provides the profit.
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For the Non-students market (b):
- Draw a similar demand curve (AR_n) that should touch the price axis at a higher price (P_n) than for the Students, reflecting less price sensitivity.
- Draw the marginal revenue curve (MR_n) below the demand curve as before.
- Again, identify the profit-maximization output where MR_n equals MC, marking the price as P'_n and quantity as Q_n.
- The profit for Non-students is determined by the area between P'_n and AC at Q_n.
Step 2
Which one of the following is necessary for a firm to be able to practise price discrimination? (b)
Answer
The correct answer is A: It has some degree of market power.
- Price discrimination occurs when a firm can set different prices for the same product to different consumers. This practice is only possible if the firm has some degree of market power, allowing it to influence prices rather than having to accept market prices.
- The other options do not directly relate to the ability to practice price discrimination effectively. B, C, and D do not adequately define the requirement as they focus on aspects like product storage and feature differentiation, which are irrelevant in the context of price discrimination.