Chapter 14, Problem 1FT

To determine

Whether the price discriminating seller charges the price lower than the marginal cost.

Explanation of Solution

The market is a structure where there are buyers and sellers who sell and the exchange of goods and services take place between them. The price is determined by the interaction of the demand and supply in the market.  The consumer decides to demand a commodity on the basis of the utility received from the commodity. The utility is the measure of satisfaction that the consumer receives from the consumption of the commodity or the service. The additional utility received from the consumption of an additional unit of the commodity is known as the marginal utility.

However, the case with the marginal cost and price is obvious. The profit maximizing seller would always charge a higher price than the marginal cost of production to all the consumers. When the case of the price discrimination is concerned, the producer would charge a little more than the marginal cost to some consumers, whereas a lot more than the marginal cost to some other consumers. The ultimate aim of the sellers is to maximize their profit and it has nothing to do with charging a price level lower than the marginal cost. Thus, the statement is wrong.

Economics Concept Introduction

Concept introduction:

Price discrimination: The price discrimination is the practice of charging different price for the exact same commodity for different consumers in the market.

Marginal Cost: The marginal cost is the additional cost incurred while producing one more additional unit of the commodity.