Answer to Question #203713 in Macroeconomics for ahsan

Question

In Karachi Nuplex Cinema has a monopoly on the rights to show movies throughout the city. The monopolist knows the price elasticities of demand for movies by children and adults which are 4 and 0.22 respectively. Suppose the monopolist can charge different prices for the children and adults

Answer 1

complete question: IN Karachi Nuplex Cinema has a monopoly on the rights to show movies throughout the city. The monopolist knows the price elasticities of demand for movies by children and adults which are 4 and 0.22 respectively. Suppose the monopolist can charge different prices for the children and adults.

1. Explain why the monopolist can charge different prices. 
2. Explain for whom shall the monopolist charge higher prices and why. Draw graph to support your answer.        

answer

1)

In monopoly, a single seller of a product is known as a monopolist. The monopolist has complete control over pricing, demand, and supply decisions, and consequently sets prices to maximize profit.

For the same commodity, the monopolist frequently charges various prices to different customers. Price discrimination (PD) is the practice of charging varying prices for the same goods. When different persons are charged different prices, this is referred to as PD. Different prices are charged depending on a consumer's economic level as well as their propensity to purchase a product, or they charge different rates depending on how a product is used.

2) Monopolists charge the price according to the elasticity of demand (Ed) of its product. That means higher the Ed, lower the price, and vice versa. In this case Ed for children (4) is higher than that for the adults (0.22). Hence they will charge less for the children and more of the adults.

Monopoly equilibrium can only be achieved when the elasticity of the monopolist's average revenue curve (AR) is greater than one, as illustrated in Figure below, where DD' is the AR, DMR is the marginal revenue curve, and MC, MC1 and MC2 are the monopolist's three marginal cost curves. Demand is unitary elastic, Ed=1 at B, larger than one between D and B, and less than one between B and D.