Answer to Question #76782 in Microeconomics for Sejol
a) With the help of an appropriate graph (for simplicity, assume the seller is a monopoly), show how a firm can profit by restricting the quantity it sells (while keeping the legal price the same), while practising price discrimination with a subset of consumers.
The purpose of price discrimination is generally to capture the market's consumer surplus. This surplus arises because, in a market with a single clearing price, some customers (the very low price elasticity segment) would have been prepared to pay more than the single market price. Price discrimination transfers some of this surplus from the consumer to the producer/marketer. Strictly, a consumer surplus need not exist, for example where some below-cost selling is beneficial due to fixed costs or economies of scale. An example is a high-speed internet connection shared by two consumers in a single building; if one is willing to pay less than half the cost, and the other willing to make up the rest but not to pay the entire cost, then price discrimination is necessary for the purchase to take place.
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