DP Economics

Test builder »

Question 18N.3.HL.TZ0.1g

Select a Test
Date November 2018 Marks available [Maximum mark: 4] Reference code 18N.3.HL.TZ0.1g
Level HL Paper 3 Time zone TZ0
Command term Explain Question number g Adapted from N/A
g.
[Maximum mark: 4]
18N.3.HL.TZ0.1g

Firm A produces cartons of coffee. Figure 1 illustrates the firm’s total cost (TC) and variable cost (VC) at different output levels per month.

Figure 1

Figure 2 illustrates the average total cost (ATC), average variable cost (AVC) and marginal cost (MC) at different output levels for Firm B, which produces cans of tea.

The price of tea in the perfectly competitive tea market is presently $21 per can.

(g)

Firm B conducted a market survey and found out that the price elasticity of demand for its brand of tea is 0.8 among urban customers, whereas it is 1.2 among customers in rural areas. The sales director said “This information could help Firm B to raise its revenue, by trying to separate the two markets, provided that certain conditions are satisfied”. Explain this statement.

[4]

Markscheme

Firm B could:

  • price discriminate in two separate markets (charge different prices in different/separate markets)
  • charge a higher price to urban customers (or a lower price to rural)
  • when demand is inelastic a higher price yields more revenue (or when elastic demand a lower price yields more revenue)
  • Firm B needs to separate the two markets so no opportunity for resale (or Firm B needs to have some monopoly/price-setting power).

Syllabus sections