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March Common Test - 2011 - H2 - EQ 1

March Common Test - 2011 - H2 - EQ 1

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Published by Ta Minh Trang

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Published by: Ta Minh Trang on Sep 08, 2011
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05/21/2014

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2011TJCH2EconomicsMCTEQ1
 
1
Fastfoodrestaurantsoftenissuecouponswhichenablemealstobepurchasedatadiscount.(a)Explainwhethertheaboveisanexampleofpricediscrimination.(10)(b)Discusswhethersuchpracticesbenefitproducersorconsumersmore.(15)
(a)Explainwhethertheaboveisanexampleofpricediscrimination.(10)
L1:Definepricediscriminationidentifytheconditionsofpricediscrimination(1-3)
 
Pricediscriminationreferstothepracticeofchargingdifferentconsumersdifferentpricesforanidenticalproductforreasonsnotassociatedwithdifferencesincosts
 
TheconditionsforPDtooccur
o
 
Thefirmsmustbeapricesetter
o
 
Differentbuyershavedifferentpriceelasticitiesofdemand(PED)
o
 
Segmentationofbuyersispossible
o
 
SeepagebetweenbuyersislimitedL2:Explaintheconditionsforpricediscriminationtooccur(4-6)
 
Tosetdifferentpricesfordifferentconsumers,afirmsmustbeapricesetteri.e.themarketmustbeeitheramonopoly,oligopolyormonopolisticcompetition
 
Higherpricesarechargedforbuyerswhoarewillingtopaymorei.e.thosewithmoreinelasticPED
 
Firmsmustbeabletoidentifyandseparatewhichbuyersarewillingtopaymore
 
Thosewhoboughtatalowerpricemustbeunableorunwillingtore-sellthegoodtoothersL3:Analysewhethertheaboveareexamplesofpricediscrimination(6-10)
 
Fastfoodrestaurantsarepricesettersbecausethefoodsoldisdifferentiatede.g.Macdonald'sfoodtastesdifferentfromBurgerKing
 
Thepriceofamealformsasmallerproportionofincomefortherichthanthepoor
thericharewillingtopaymoreandhencehavemoreinelasticPED
 
Buyersareseparatedbythecoupons
buyerswithhigherPEDaretheoneswhowillbotherwithkeepingandusingthecoupons
 
Seepageislimited
whileconsumerswithcouponsmayshareextracouponswiththeirfamilyandfriends,theyareunlikelytobewillingtopassthemtostrangers
 
However,themealonthecouponissometimesalittledifferentfromthestandardmeale.g.thecouponmealmayhavelessitems
thisisnotconsideredasPDasthemealisnolongeridenticalandneitheristhecostofproducingthemeal
 
2011TJCH2EconomicsMCTEQ1
 
2
(b)Discusswhethersuchpracticesbenefitproducersorconsumersmore.(15)
L1:RecognizethatwithPD,firmsgenerallybenefitattheexpenseofconsumers(1-2)
 
PDcausesconsumersurplustobetransferredtoproducers
 
ProducersearnmoreprofitwhilesomeconsumerssufferfromhigherpricesL2:ExplainandillustratehowPDbenefitproducersattheexpenseofconsumers(3-8)
 
IfthereisnoPD,thefirmsetsthepriceandoutputwhereMC=MR
 
With1
st
degreePD,thedemandcurvebecomesthenewMRcurveasthefirmdoesnothavetolowerpriceofpreviousunitsinordertoselltheextraunit
 
ThenewprofitmaxoutputwithPDiswhereMC=MR2=DD
 
Asallconsumersurplusisnowtransferredtotheproducer,thisimpliesthatproducersbenefitattheexpenseofconsumers
 
(ExplainandIllustratewithfigure1inMarketStructureIssueslecturenotes)
 
Althoughtheanalysisisdonewith1
st
degreePD,theimplicationscanbeextendedtoallformsofpricediscriminationL3:AnalyzehowconsumerscanalsobenefitfromPDinthegivenexample(9-11)
 
Someconsumerswhodidnotconsumethegoodpreviouslynowgettoconsumethegoodsotheybenefitfromtheutilitygainedfromsuchconsumption
 
Withoutcoupons,poorerindividualsmayfindthenon-discountedpriceofafastfoodmealtooexpensiveandnotbuythemeal,butwiththediscountcoupons,theynowbuyandenjoythemealE:Discusswhetherproducersorconsumersbenefitmoreinthegivenexample(+4)
 
Ideally,tomaximizeprofits,afastfoodrestaurantwouldgivethecouponstoconsumerswhowouldnothaveboughtthemealatthefullprice
 
Howevergiventhatitisnotpossibletoidentifysuchconsumers,discountcouponsareusuallygivenoutrandomlye.g.insertedintonewspaperssosomewhowereactuallywillingtopaythefullpricenowgettopaythediscountedcouponprice
 
Consumerswhousethecouponsdefinitelygainwhilethosewhodonotusethecouponsdonotlooseasthestandardpriceofthemealusuallyremainsunchanged
 
Ontheotherhand,thefirmonlybenefitsifthegaininprofitsfromthenewcustomersexceedthelossinprofitsfromtheexistingcustomerswhonowpayless
 
Whilethebenefitstotherestaurantareuncertain,consumersclearlybenefit
 
Thusitseemsthatconsumersarelikelytobenefitmorethanproducersfromtheuseofdiscountcoupons

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