Answer:
Price discrimination is when a producer charges different prices, to different consumers for the same good or service. Therefore, an airline that charges different prices to different passengers for the same flight is practicing a third degree price discrimination because consumers are charged different prices based on their different demand elasticities.
Economic efficiency is when scarce resources are used in the most efficient way to produce maximum output; it consists of productive efficiency and allocative efficiency. For price discrimination to be possible, the firm must have a certain degree of monopoly power; that is, the firm must be a price maker. Monopolies typically fit into this description as they discriminate by charging consumers with an inelastic demand higher prices; this reults in allocative ineffciency because price is greater than the Marginal Cost (P>MC).
On the other hand price discrimination could increase efficiency; price discrimination aims to convert consumer surplus to producer surplus, thereby increasing the profit of the firm. An increase in profits could be dedicated to investement in research and development; this could see such a firm achieve dynamic efficiency (long-run productive efficiency). Secondly, due to the increased profits and the potential for more profits, output is increased and price moves closer to the MC (Closer to allocative efficiency). In addition, an increase output would mean that the firm is making use of its spare/idle capacity in production, moving output towards optimum. From another perspective, a firm can reap economies of scale through price discrimination; this is because price discrimination leads to an increase in output and a reduction in average cost.
Explanation:
Answer: A. Higher
B. The implication for Beta Co. is that because of its lower ROI, its ability to raise capital will be reduced.
Explanation:
a. What would you expect Alpha’s ROI to be relative to the ROI of Beta Co.? Explain your answer.
In this case, Alpha’s ROI to be relative to the ROI of Beta Co. will be higher. Since Alpha's investment cost is lower when compared to that of ‘Beta Co. while both companies have thesame operating income, then the return on investment of Alpha will then be higher than that of Beta due to the lower investment cost that Alpha incurred.
b. What are the implications of this ROI difference for a firm seeking to enter an established industry?
The implication for Beta Co. is that because of its lower ROI, its ability to raise capital will be reduced.
