Which of the following statement regarding the third degree price discrimination is incorrect?

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BlackTom AI · Accepted Answer

Question restatement: The prompt asks which statement about third-degree price discrimination is incorrect, given four options.
Option 1: 'It requires the monopolist to know the demand function for each potential buyer.' This is essentially correct in spirit: to set distinct prices across groups, the monopolist needs to know how each group responds to price, i.e., the demand in each market.
Option 2: 'The deadweight loss is greater than the single price monopoly.' This is typically false. Third-degree price discrimination usually lowers deadweight loss compared with a single-price monopoly because output in each market is raised by charging lower prices to more elastic segments, increasing overall quantity and better aligning price with willingness to pay. While some DWL can remain due to indivisibilities or imperfect segmentation, it is not generally larger than the DWL from a single-price monopoly.
Option 3: 'The monopolist can separate its buyers into a few identifiable markets.' This is a defining feature of third-degree price discrimination: segmenting the market into identifiable groups to charge different prices.
Option 4: 'The monopolist can follow a different pricing policy in each market.' This is also true, since segmentation allows distinct prices or terms in each market.

Why the others are correct (brief rationale):
- Knowing each market’s demand (Option 1) is needed to set appropriate prices per segment. 
- Market separation into identifiable groups (Option 3) enables targeted pricing strategies. 
- Implementing different pricing policies per market (Option 4) follows from the ability to segment and price discriminate.

Why Option 2 is incorrect: Under third-degree price discrimination, the monopolist expands output by serving more consumers at different prices, which tends to reduce the deadweight loss relative to a single-price monopoly. Since more trades occur where buyers’ marginal willingness to pay is above marginal cost, the overall DWL is typically smaller, not larger. This makes the claim that DWL is greater incorrect.

2251-ECON-301-01Z-J1-1027 Quiz 14 (1% of Course Grade) - Chapter 26 - Monopoly Behavior

Which of the following statement regarding the third degree price discrimination is incorrect?

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